Answered: rate is R=20%. Using the two-period…

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rate is R=20%. Using the two-period consumption-savings model, how will this year's consumption change?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

A worker has a discount factor strictly less
than 1 (beta<1). He receives a wage rise of
£1,000 this year and expects to receive a
further rise of £1,200 next year. The interest
rate is R=20%. Using the two-period
consumption-savings model, how will this
year's consumption change?
a. Consumption will increase by less than
£1,000
b. Consumption will increase by £1,000
c. Consumption will increase by more than
£1,000
d. It is not possible to answer with the
information that is provided

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