True, False, or Uncertain [48 marks 6 marks each] Explain why each of the follow

Question

True, False, or Uncertain [48 marks 6 marks each] Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important. A3-1. Assuming that all endowment income is earned in the present then, if a household considers both present and future consumption to be normal goods, an increase in income earned in the present causes the household to increase its saving.

Explanation / Answer

When all the income is earned in the present, then both future consumption and current consumption depend upon the present income. In that sense if the present income increases intertemporal budget constraint will shift outwards and this will increase both periods consumption. In this sense the household will be consuming more as well as save more in the current period.

The statement is correct.

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