A change in the interest rate changes the slope of the inter temporal budget constraint, which implies a change in the relative price of current and future consumption. Whenever a price changes, we know that in general there will be both a substitution effect and a wealth effect at work, making the analysis slightly more complicated. As it turns out, what we can say about how individuals react to a change in the interest depends on whether the individual is planning to be a borrower or a lender. We will consider each case in turn.
