Suppose consumption in year 2 (C2) is on the horizontal axis and consumption in year 1 (C1) is on the vertical axis. How would an increase in the interest rate affect the consumer's choices? (which curve(s) would shift/change shape and how?) You may, but do not have to, draw a diagram
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![Suppose consumption in year 2 (C2) is on the horizontal axis and
consumption in year 1 (C1) is on the vertical axis. How would an increase
in the interest rate affect the consumer's choices? (which curve(s) would
shift/change shape and how?) You may, but do not have to, draw a
diagram.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fadae29eb-8057-4877-8207-e3df8af1b010%2Ff7820610-9c04-4488-b8ab-1fb67698112e%2F566d9j8_processed.jpeg&w=3840&q=75)
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- explain using a two period indifference curve how an individual would respond to an increase in interest rate by increasing or decreasing saving, explain using graphsWhen analyzing how borrowing and lending affect the consumer's budget constraint, we measure spending in the current time period on the horizontal axis and spending in the future time period on the vertical axis. Assume that the interest rate at which the consumer can lend and borrow is 10%, income in period 1 is $1000 and income in period 2 is $1200. The point of maximum current consumption can be expressed as 1000+ 1200/1.1. 1000(1.1) + 1200. 1000+ 1200 + .1 1000/1.1 + 1200/1.1 + 1.1) Sandeep consumes (c1, c2) and earns (m1, m2) in periods 1 and 2 respectively. Suppose that the interest rate is r. a) Write down Sandeep's intertemporal budget constraint in present value terms. b) If Sandeep does not consume anything in period 1, what is the most he can consume in period 2?
- APPLIED ECONOMICS Topic: Intertemporal Choice Levinn’s utility function is expressed as the following: U= C1 C2 0.3 where C1 is his first periodconsumption and C2 is his second period consumption. His income in the first period is$2500 and interest rate is at 10%. If at equilibrium, Levinn is neither a borrower nor a lender,then what is his expected income in the second period? Do not copy from othersSuppose that y =100 (income today) • y' = 150 (income tomorrow) 10% (interest rate on bonds) %3D r = • t = 10 (taxes today) • t' = 10 (taxes tomorrow) Suppose that c = 100. Is the consumer borrowing or saving, today? And what will her budget constraint look tomorrow? The consumer is borrowing. Her budget constraint tomorrow will be c' = 150 -10 - 10*(1.1) = 129 The consumer is saving. Her budget constraint tomorrow will be c' = 150 -10 + 10*(1.1) = 151 O The consumer is neither borrowing nor saving - she is breaking even. Her budget constraint tomorrow will be c' = 150 -10 = 140 O The consumer is saving. Her budget constraint tomorrow will be c' = 150 + 10*(1.1) = 161 %DAPPLIED ECONOMICS Topic: Intertemporal Choice Levinn’s utility function is expressed as the following: U= C1 C2 0.3 where C1 is his first periodconsumption and C2 is his second period consumption. His income in the first period is$2500 and interest rate is at 10%. If at equilibrium, Levinn is neither a borrower nor a lender,then what is his expected income in the second period? Show the graph if possible
- Suppose that a person can borrow and lend at an interest rate of 10 percent. But there is a 5% rate of inflation and one has to pay an income tax of 30 % on all interest income. If you borrow money, you can deduct interest as an expense. Where current consumption is on the horizontal axis and future consumption is on the vertical axis: (a) the budget line will have a kink at the point of no saving or lending. (b) the budget line will be a straight line with a slope of about 1: 02. (c) the budget line will be a straight line with a slope of about 1:05. (d) the budget line will be a straight line with a slope of about 1:35.Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding expected returns of between 20 and 25 percent; another $10 billion yielding between 15 and 20 percent; another $10 billion yielding between 10 and 15 percent; and so forth. a. Cumulate these data and present them graphically using the graph below, putting the expected rate of return (and the real interest rate) on the vertical axis and the amount of investment on the horizontal axis. Instructions: Use the tool provided 'ID' to plot the investment demand curve (plot 6 points total). 30 Tools ID 20 15 10 10 20 30 40 50 60 Investment (billions of dollars) Instructions: Enter your answers as a whole number. b. What will be the equilibrium level of aggregate investment if the real interest rate is: 15 percent: $ billion 10 percent: $ billion 5 percent: $ billion Expected rate of return, percent 25A consumer's current income (y) is 200 and the future income ( t.') is 240. A current lump sum tax (t) of 10 is paid and the tax in the next period (t) is 15. The real interest rate is 20% for each period. Please assume that current and future consumption are complements. and the consumer always prefers to have one unit of current consumption and two units of consumption in the future. Calculate the optimal current and future consumption and the optimal current and future savings. Is the consumer a lender or a borrower? How does he she. as a lender or a borrower. affect the future consumption?
- Consider a two-period consumption saving model and let f1 and f2 denote the first and secondperiod consumption, respectively. Assume that the interest rate at which the consumer may lend or borrowis 10%. Suppose that a consumer’s utility function is x (f1> f2) = f1 + 20√f2= The consumer first periodincome is L1 = $100 and the present value of her income stream is $330=(a) What is the optimal consumption stream (consumption bundle) of this consumer?(b) Is this consumer borrower or lender? How much does she borrow or lend?(c) What is the effect of a reduction of the interest rate to 5% on the consumer’s optimal first-periodsaving? (Make sure to take into account the effect of the decline in the interest rate on the present value ofthe consumer’s income stream.)What are the major economic functions of the interest rate? How might the fact that many businesses fifinance their investment activities internally affect the effifi ciency with which the interest rate performs its functions?Patience has a utility function 1/2 1/2 U(cl, c2) = c? + 0.80c/? where c is her consumption in period 1 and c is her consumption in period 2. Her income in period 1 is 3 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as in period 2? a. 2 b. 0.13 c. 0.25 d. 0 е. О.38 20% 13% 25% 0%