consumption and less future consumption in response to the lower interest rate, with no change in utility. The

substitution arrows on the horizontal and vertical axes of Figure B6 show the direction of the substitution
effect motivation. The substitution effect suggests that, because of the lower interest rate, Quentin should

consume more in the present and less in the future.

Quentin also has an income effect motivation. The lower rate of return shifts the budget constraint to the left,

which means that Quentin’s utility or “buying power” is reduced. The income effect (assuming normal goods)

encourages less of both present and future consumption. The impact of the income effect on reducing present

and future consumption in this example is shown with “i” arrows on the horizontal and vertical axis of Figure

B6.
528 B • Indifference Curves

FIGURE B6 Indifference Curve and an Intertemporal Budget Constraint The original choice is A, at the tangency
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