Why household decides not to borrow or lend at all

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Suppose that a household in a two-period model has income of $30,000 in period 1 and $25,000 in perod 2, and the interest rate is 75%. Assume that the price of the good is $1 in both periods. Suppose that the household decides to consume 26,000 in period 1 and 32, 000 in period 2. Now suppose that the interest rate falls to 50%, and the household decides not to borrow or lend at alll. Is the household better off or worse off with the higher interest rate?

Reference no: EM13201944

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