Inter temporal Choice

Question 1

What are the intercepts of the Intertemproal budget constraint?

Answer 1

• Y: I1 + I0(1+i) (FV of earnings)

- X: I0 + (I1/(1+i)) (PV of earnings)

Question 2

What does patience and impatience refer to in the inter temporal choice?

Answer 2

• Patience implies a symmetrical indifference curve around the 45 degree line
• Impactience implies that the MRS if greater than 1 where it
  intersects the 45 degree line

Question 3

What is the slope of the inter temporal budget constraint?

Answer 3

Marginal rate of time preferences: -(1+r)

Question 4

What is equilibrium in the inter temporal choice?

Answer 4

MRS = (1+r)

Question 5

What is true of an interest rate increase for a borrower?

Answer 5

• In this situation a borrower remaining a borrower will be worse off: it might be that switching to saving can increase utility, determined by shape of indifference curves

Question 6

What is true of an interest rate decrease for a borrower?

Answer 6

In this situation a borrower will not ever become a saver, as it would require a lower indifference curve