In Irving Fisher's two-period model, if the consumer is initially borrowing in period one and the real interest rate rises, first-period consumption will:
A) certainly rise.
B) certainly fall.
C) remain constant.
D) either rise or fall.

Question

Quizplus · Accepted Answer

In Fisher's two-period model, when the real interest rate rises, it becomes more expensive to borrow in the first period. This means that the consumer would need to reduce their borrowing in the first period to maintain intertemporal budget constraint between the present and the future. As a result, the first-period consumption would fall. Therefore, the correct choice is B.

In Irving Fisher's Two-Period Model, If the Consumer Is Initially