An increase in income in period one in Irving Fisher's two-period consumption model increases consumption in:
A) period one, but decreases consumption in period two.
B) period one, but does not change consumption in period two.
C) both periods one and two, as long as consumption in period one and consumption in period two are both normal goods.
D) period two, but does not change consumption in period one.

Question

Quizplus · Accepted Answer

According to Irving Fisher's two-period consumption model, if income increases in period one, consumption in period one will increase because it is a normal good. However, consumption in period two will also increase because period two consumption is assumed to be a function of total lifetime income, which has increased due to the increase in income in period one. If both period one and period two consumption are normal goods, then an increase in income in period one will increase consumption in both periods. Therefore, choice C is correct.

An Increase in Income in Period One in Irving Fisher's