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(a) The market interest rate is 10%. Draw the individual's lifetime budget constraint. What is the present value of their (lifetime) income? (b) Is the individual likely to be a saver or a borrower? (c) Suppose the market interest rate now rises to 20%. Draw the new budget line and compare it to the old one. Is the individual likely to save more or less (or borrow less or more), following the increase in the interest rate?

(a) The market interest rate is 10%. Draw the individual's lifetime budget constraint. What is the present value of their (lifetime) income? (b) Is the individual likely to be a saver or a borrower? (c) Suppose the market interest rate now rises to 20%. Draw the new budget line and compare it to the old one. Is the individual likely to save more or less (or borrow less or more), following the increase in the interest rate?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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a, b and c

Consider an individual with income of nothing in period 1 and $100 in period 2. Assume the price of the (single) output is $1 in both periods. (a) The market interest rate is 10%. Draw the individual's lifetime budget constraint. What is the present value of their (lifetime) income? (b) Is the individual likely to be a saver or a borrower? (c) Suppose the market interest rate now rises to 20%. Draw the new budget line and compare it to the old one. Is the individual likely to save more or less (or borrow less or more), following the increase in the interest rate?
Transcribed Image Text:Consider an individual with income of nothing in period 1 and $100 in period 2. Assume the price of the (single) output is $1 in both periods. (a) The market interest rate is 10%. Draw the individual's lifetime budget constraint. What is the present value of their (lifetime) income? (b) Is the individual likely to be a saver or a borrower? (c) Suppose the market interest rate now rises to 20%. Draw the new budget line and compare it to the old one. Is the individual likely to save more or less (or borrow less or more), following the increase in the interest rate?
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