A typical worker will earn £300k in their youth and £600k in middle-age. Over their lifetime, they must choose between two "goods": consumption in their youth and consumption in middle-age. When young, the worker has the option of putting their earnings in the bank at an interest rate of 0% - these savings can then be spent in middle-age. Alternatively, they can borrow money from the bank when young. This loan must be paid back in middle-age at a 100% interest rate. (a) What is the maximum amount of money the worker can borrow when young? (b) Draw a large graph with "consumption when young" on the vertical axis and "consumption in middle-age" on the horizontal axis. Represent the worker's budget set. Note: both axes should be labelled from £0 to £1,000k. (c) The government wishes to stimulate spending, and writes a law to reduce the interest rate from 100% to 0%. On the same graph, show the effect of this policy on the worker's budget set.
A typical worker will earn £300k in their youth and £600k in middle-age. Over their lifetime, they must choose between two "goods": consumption in their youth and consumption in middle-age. When young, the worker has the option of putting their earnings in the bank at an interest rate of 0% - these savings can then be spent in middle-age. Alternatively, they can borrow money from the bank when young. This loan must be paid back in middle-age at a 100% interest rate. (a) What is the maximum amount of money the worker can borrow when young? (b) Draw a large graph with "consumption when young" on the vertical axis and "consumption in middle-age" on the horizontal axis. Represent the worker's budget set. Note: both axes should be labelled from £0 to £1,000k. (c) The government wishes to stimulate spending, and writes a law to reduce the interest rate from 100% to 0%. On the same graph, show the effect of this policy on the worker's budget set.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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i need help on this with the graphs etc
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