An increase in interest rate will:
A)parallel shift the budget line down.
B)rotate the budget line clockwise around the intercept with the vertical axis.
C)rotate the budget line clockwise around the endowment point.
D)parallel shift the budget line up.

Question

Quizplus · Accepted Answer

An increase in interest rate affects the slope of the budget line because it changes the relative price of consuming today versus saving and consuming in the future. This results in a rotation of the budget line around the endowment point (which represents the initial allocation of resources), typically leading to a change in the slope without shifting the position of the endowment point itself.

An Increase in Interest Rate Will