In the case where current and future consumption are perfect complements,an increase in the real interest rate
A) involves only income effects.
B) has ambiguous effects depending on whether the substitution or income effects dominate.
C) involves only subsitution effects.
D) involves a substitution effect only for lenders.
E) is relevant only for borrowers.

Question

Quizplus · Accepted Answer

When current and future consumption are perfect complements, consumers aim to maintain a fixed ratio between them. An increase in the real interest rate affects the consumer's budget constraint, leading to an income effect as the consumer adjusts to maintain the desired consumption ratio, without any substitution effect.

In the Case Where Current and Future Consumption Are Perfect