An individual has a subjective discount rate of 10%, indicating they require a 10% return to willingly delay consumption for one year. The market interest rate, at which they can borrow or lend, is 5%. To move towards their optimal consumption plan over time, what action should this individual take?

Intertemporal Consumption Disequilibrium

An individual is considered to have reached their optimal intertemporal consumption plan when their subjective rate of time preference is equal to the market interest rate. A necessary consequence of this equilibrium is that their consumption level in the present period will be identical to their consumption level in the future period.

Evaluating Intertemporal Consumption Choices

An individual is making consumption choices over two periods. At their current consumption level, the rate at which they are personally willing to trade future consumption for one unit of present consumption is 1.08. The market allows them to trade future consumption for present consumption at a rate of 1.05. Based on this information, which of the following is true?

The Logic of Intertemporal Optimality

An individual is making consumption choices over two periods. Match each scenario, which describes the relationship between their personal valuation of present consumption and the market trade-off, with the corresponding action that would move them toward their optimal consumption plan.

For an individual making consumption choices over time, the point of optimal consumption is reached when their subjective discount rate, denoted by ρ, is equal to the market interest rate, denoted by ____.

The Economic Intuition of Intertemporal Optimality

An individual making a consumption choice over two periods finds that their personal rate of time preference is greater than the market interest rate. To increase their overall satisfaction, this individual should increase their current savings.