Consider the 2-period model of consumption with a constant intertemporal elasticity of substitution (IES) utility. An re
Posted: Sat Mar 19, 2022 5:52 pm
Consider the 2-period model of consumption with a constant
intertemporal elasticity of substitution (IES) utility.
An reduction in the interest rate
a.
implies a reduction in the marginal propensity to consume out of
wealth if the IES is smaller than 1.
b.
implies a reduction in consumption for a given level of wealth
if IES is larger than 1.
c.
may increase or decrease consumption depending on the income
effect when the IES is larger than 1
intertemporal elasticity of substitution (IES) utility.
An reduction in the interest rate
a.
implies a reduction in the marginal propensity to consume out of
wealth if the IES is smaller than 1.
b.
implies a reduction in consumption for a given level of wealth
if IES is larger than 1.
c.
may increase or decrease consumption depending on the income
effect when the IES is larger than 1