Using the two periods model of the current account presented in class, explain the effects of a decrease in the interest rate on consumption, trade balance, and the current account of each period. Consider both the case of a “borrower” and a “lender”. Your graph should show both the income and the substitution effect. Please make sure to label the axes, endowment point, and consumption bundles.
Using the two periods model of the current account presented in class, explain the effects of a decrease in the interest rate on consumption, trade balance, and the current account of each period. Consider both the case of a “borrower” and a “lender”. Your graph should show both the income and the substitution effect. Please make sure to label the axes, endowment point, and consumption bundles.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Using the two periods model of the current account presented in class, explain the effects of a decrease in the interest rate on consumption, trade balance, and the current account of each period. Consider both the case of a “borrower” and a “lender”. Your graph should show both the income and the substitution effect. Please make sure to label the axes, endowment point, and consumption bundles.
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