Consumption when young and consumption when old are both normal goods for Seymour, a worker saving for retirement. When the interest rate falls, what happens to Seymour’s consumption when old?

a. It definitely increases.

b. t definitely decreases.

c. It increases only if the substitution effect exceeds the income effect.

d. It decreases only if the substitution effect exceeds the income effect.

Intertemporal choice in the consumption shows the trade-off between two periods of consumption. Suppose Sam lives in two periods, one in which he earns and another in which he does not earn. If consumption in period one is more and savings are less, then the consumption in period two will be low. The opposite will hold if, in period one, the savings are high.

The income is low when young Seymour has just entered the job market or will be entering the job market; thus, the income is low. When Seymour is old, the income will be low as he has retired from the job market.

Suppose the interest rate falls, which means the returns on savings reduce; this will discourage savings and encourage consumption when Seymour is young. A lower saving today would mean fewer resources for buying consumption goods when Seymour is retired and old; this will reduce his consumption in the second phase of his life.