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As an example, suppose that Christopher is initially a borrower, whose income in the current year and next year is $40,000 (in current year dollars).
As an example, suppose that Christopher is initially a borrower, whose income in the current year and next year is $40,000 (in current year dollars). Initially, Christopher takes out a loan of $20,000 in the current year, so that he can consume $60,000 in the current year. The real interest rate Ewe, so that the urincipal and int--r t on his loan ' 221 000, and he consumes $19,000 next year Now, suppose a ternatively that t e real interest rate is 10%. if Christop er 0 Is constant his consumption in the xture, this must imply that his current consumption goes down, reecting the negative income effect. That is, if he continues to consume $19,000 next year, given a real interest rate of 10%, he can borrow only $19,091 this year, which implies that his current year consumption is $59,091. 1" .1 1 1 11 .1 ' ' . . 1 'I .l. .' PI" . f
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