Which of the following is the correct statement of an intertemporal budget constraint?
A) C1 = (1 + r)(W + Y1) - C2 + Y2
B) C2 = (1 + r)(W + Y1 - C1) + Y2
C) W = (1 + r)(Y1 + Y2) - (C1 + C2)
D) Y2 = (1 + r)(W + Y1 - C1)

Question

Quizplus · Accepted Answer

Intertemporal budget constraint shows the relationship between an individual's current consumption, future consumption, and income. It is essentially balancing consumption and income over two or more time periods. Option B correctly represents this concept, where C1 is current consumption, C2 is future consumption, W is current wealth or income, Y1 is income in the current period, Y2 is income in the future period, and r is the interest rate. Option A is incorrect as it has only included the present value of the future income but not subtracted the future consumption. Option C is incorrect as it has not included any consumption variables. Option D is incorrect as it has only included the future income and not consumption variables.

Which of the Following Is the Correct Statement of an Intertemporal