Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Chapter 17, Problem 17.2P
To determine
To find:Fraction of income to be saved for retirement.
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Suppose that you earn $320 in year 1 and will ean $720 in year 2. If you borrow money against your future income you will have and additional $576 to
spend in year 1, and if you lend all of your current income you will have and additional $400 to spend in year 2. In both years you consume only food which
costs $1 per kilogram in each year.
What is the interest rate that you borrow and lend at?
R=
Let your MRS for food in year 1 with food in year 2 be given by the formula
where F is the amount of food consumed this year and F is the amount
of food consumed next year.
Calculate your consumption bundle:
F =
F =
Suppose the interest rate at which you can borrow and lend changes to 20%.
Calculate your new consumption bundle:
F =
F2 =
Which interest rate is preferred?
The initial interest rate found in part 1
O The new interest rate, 20%
Suppose Poornima is an avid reader and buys only comic books. Poornima deposits $3,000 in a bank account that pays an annual nominal interest
rate of 10%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a comic book is priced at $15.00.
Initially, the purchasing power of Poornima's $3,000 deposit is
comic books.
For each of the annual inflation rates given in the following table, first determine the new price of a comic book, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Poornima's deposit after one year in the first row of the table for each inflation rate.
Finally, enter the value for the real interest rate at each of the given inflation rates.
Hint: Round your answers in the first row down to the nearest comic book. For example, if you find that the deposit will cover 20.7 comic books, you
would round the purchasing power down to 20 comic books under the assumption that Poornima will…
You borrowed $200 and repaid $211 at the end of the year. During the year, inflation was 0.7%. What
was the real interest rate, in percent?
(Please use the Fisher effect to approximate your answer if appropriate.)
Round to one decimal place digit and do not enter the % sign. If your answer is 6.14%, enter 6.1. If your
answer is 6.16%, enter 6.2. If appropriate, remember to enter the-sign
4.8
Chapter 17 Solutions
Microeconomic Theory
Knowledge Booster
Similar questions
- Assume Medet decided to buy a car. His friend Aidar has lent him $10,000 USD. Medet and Aidar agree that Aidar should earn a real return of $5 percent per year. Enter your responses rounded to two decimal places. (a). The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be $111 in one year and $128 in two years. What nominal rate of interest should Aidar charge Medet? The nominal rate of interest charged should be % in year 1. The nominal rate of interest charged should be % in year 2. (b). Suppose Aidar and Medet are unsure about what the CPI will be in one year. How should Aidar and Medet's annual repayments ensure that he gets an annual $5 percent rate of return? Aidar should charge Medet % more than the inflation rate.arrow_forwardHarper is a short-lived human who only lives for two years: current year and next year. In the current year, Harper has an income of $189 and has to pay $36 in taxes. Harper expects that he can receive an income of $132 and has to pay $27 in taxes next year before he dies. The real interest rate between current and next year is 7%. What is Harper's lifetime wealth (in $)? Round your answer to at least 2 decimal placesarrow_forwardDon't copyarrow_forward
- Suppose that you eam $250 in year 1 and will ean $448 in year 2. If you borrow money against your future income you will have and additional $400 to spend in year 1, and If you lend all of your current income you will have and additional $280 to spend in year 2. In both years you consume only food which costs $1 per kilogram in each year. What is the interest rate that you borrow and lend at? R= F2 where F is the amount of food consumed this F1 Let your MRS for food in year 1 with food in year 2 be given by the formula year and Fo is the amount of food consumed next year. Calculate your consumption bundie: F1 = F2 = %3! Suppose the interest rate at which you can borrow and lend changes to 40%. Calculate your new consumption bundle: %3D Which interest rate is preferred? O The initial interest rate found in part 1 The new interest rate, 40%arrow_forwardScenario 21-3 Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which he works an earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings. Refer to Scenario 21-3. If the interest rate on savings increases, a. Scott will always increase his savings in the work period. b. Scott will increase his savings in the work period if the income effect is greater than the substitution effect for him. c. Scott will decrease his savings in the work period if the income effect is greater than the substitution effect for him. Od. Scott will decrease his savings in the work period if the substitution effect is greater than the income effect for him. Carrow_forwardConsider a perpetuity with a coupon of 100. Imagine that the perpetuity is purchased at time t when the market interest rate is equal to 5%. Furthermore, imagine that the coupon income is taxed at 40% and that capital gains are taxed at 20%. What is the after tax rate of return if the perpetuity is sold at time t+1 when the market interest rate continues to be equal to 5%?arrow_forward
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