Suppose that y =100 (income today) y' = 150 (income tomorrow) • r = 10% (interest rate on bonds) • 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 The consumer is neither borrowing nor saving - she is breaking even. Her budget constraint tomorrow will be c' = 150 -10 = 140 The consumer is saving. Her budget constraint tomorrow will be c' = 150 + 10*(1.1) = 161

Suppose that y =100 (income today) y' = 150 (income tomorrow) • r = 10% (interest rate on bonds) • 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 The consumer is neither borrowing nor saving - she is breaking even. Her budget constraint tomorrow will be c' = 150 -10 = 140 The consumer is saving. Her budget constraint tomorrow will be c' = 150 + 10*(1.1) = 161

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Refer to the below figure: the saving function can be given as: Aggregate consumption (C) 270 200 130 60 450 100 S = -60 -0.3Y O S = -60+ 0.3Y O S = 60+ 0.7Y O S = -60 -0.7Y O S = -60 +0.7Y 200 300 Aggregate income (Y)