In the two-period model, a decrease in the real interest rate causes the budget constraint to
A)shift to the left in a parallel fashion.
B)shift to the right in a parallel fashion.
C)rotate in a clockwise direction.
D)rotate in a counterclockwise direction.

Question

Quizplus · Accepted Answer

A decrease in the real interest rate reduces the opportunity cost of consuming today rather than saving for future consumption, effectively making future consumption cheaper relative to current consumption. This causes the budget constraint to rotate in a counterclockwise direction, as it becomes easier to consume more in the future for the same level of current consumption.

In the Two-Period Model, a Decrease in the Real Interest