The line that connects the maximum that one can consume this year (now, on the horizontal axis)and the maximum one can consume next year:
A)has a slope of (1 + r).
B)has a slope of - (1 + r).
C)has a slope of r.
D)has a slope of 1/r.

Question

Quizplus · Accepted Answer

The line connecting the maximum one can consume this year and next year is the budget constraint in an intertemporal choice model. Its slope is negative because if you consume more this year, you have less to save and invest, which reduces consumption possibilities next year. The slope is -(1 + r) because for each unit of consumption foregone this year, you get (1 + r) units next year, due to the interest rate r.

The Line That Connects the Maximum That One Can Consume