If the Euler equation did not hold, then:
A) the real interest rate would be zero.
B) a consumer would not spend all of his or her lifetime wealth.
C) a consumer could move consumption from one period to another and increase lifetime utility.
D) the consumer has spent more than his or her lifetime wealth.
E) None of these answers is correct.

Question

Quizplus · Accepted Answer

The Euler equation is a fundamental principle in economics that describes how a rational consumer chooses to allocate consumption over different time periods to maximize utility. If the Euler equation did not hold, it would imply that the consumer could rearrange consumption between periods in such a way as to increase overall lifetime utility, indicating that the initial allocation was not optimal. This is because the Euler equation ensures that the marginal utility of consumption is balanced across time, taking into account the real interest rate.

If the Euler Equation Did Not Hold, Then