Macroeconomics
Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
Question
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Chapter 4, Problem 1NP

a)

To determine

The consumer’s saving and consumption.

a)

Expert Solution
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Explanation of Solution

A consumer is making saving plans for this year and next year.

Let her income is Y, saving is S, and consumption is C, which is same in both the years.

Income in year 1 is Y1.

Income in year 2 is Y2.

The consumer’s saving in the 1st year is Y1-C

The consumer’s saving in second year is Y2-C.

Saving the 1st year earn interest rate R%.

Let consumer pay X amount as tuition fee.

Then, the mathematical expression for tuition fee would be:

  X=(Y1C)(1+r)+(Y2C) 

Given,

Y1 = Y2 = $50,000,

X = $16,800,

R = 10%,

  ( Y 1 C)( 1+r)+( Y 2 C)=$16,800( 50,000C)( 1.1)+( 50,000C)=$16,800( 50,000C)( 1.1+1)=$16,800( 50,000C)( 2.1)=$16,80050,000C=8,000

After rearranging this equation, the value of consumption and saving is derived:

C = $42,000

S = $8,000 (= $50,000-$42000)

b)

To determine

The change in saving and consumption when consumer’s current income rises from $50,000 to $54,200.

b)

Expert Solution
Check Mark

Explanation of Solution

New income Y1 = $54,200,

Y2 = $50,000

X = $16,800,

R = 10%,

   ( Y 1 C )( 1+r )+( Y 2 C )=$16,800 ( 54,200C )( 1.1 )+( 50,000C )=$16,800109,6202.1C=$16,800

After rearranging this equation, the value of consumption and saving is derived:

C = $44,200

S = $10,000 (= $54,200-$44200).

Therefore, a rise in current income decreases the saving and increases the consumption.

c)

To determine

The change in saving and consumption when consumer’s expected income rises from $50,000 to $54,200 next year.

c)

Expert Solution
Check Mark

Explanation of Solution

Y1 = $50,000

New expected income, Y2 = $54,200,

X = $16800,

R = 10%,

  ( Y 1 C)( 1+r)+( Y 2 C)=$16,800( 50,000C)( 1.1)+( 54,200C)=$16,800109,2002.1C=$16,800

After rearranging this equation, the value of consumption and saving is derived:

C = $44,000

S = $6,000 (= $50,000-$44000).

Therefore, a rise in future income decreases the saving and increases the consumption.

d)

To determine

The change in saving and consumption when during the current year consumer receives an inheritance of $1050 (an increase in wealth, not income).

d)

Expert Solution
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Explanation of Solution

Y1 = Y2 = $50,000,

X = $16,800,

R = 10%,

The amount of inheritance I = $1,050.

   ( Y 1 +IC )( 1+r )+( Y 2 C )=$16,800 ( 50,000+1,050C )( 1.1 )+( 50,000C )=$16,800106,1552.1C=$16,800

After rearranging this equation, the value of consumption and saving is derived:

C = $42,550

S = $7450 (= $50,000-$42550).

Therefore, a rise in wealth leads to decrease the saving and increase the consumption.

e)

To determine

The change in saving and consumption when the expected tuition payment for next year rises from $16,800 to $18,900.

e)

Expert Solution
Check Mark

Explanation of Solution

Y1 = Y2 = $50,000,

New expected tuition payment X = $18,900,

R = 10%,

  ( Y 1 C) ( 1+r)+( Y 2 C)=$18,900( 50,000C)( 1.1)+( 50,000C)=$18,900105,0002.1C=$18,900

After rearranging this equation, the value of consumption and saving is derived:

C = $41000

S = $9000 (= $50,000-$41000).

Therefore, a rise in expected tuition fee for next year leads to increase the saving and decrease the consumption.

f)

To determine

The change in saving and consumption when rate of interest rises from 10% to 24%.

f)

Expert Solution
Check Mark

Explanation of Solution

The real interest rate rises from 10% to 24%.

Y1 = Y2= $50,000,

X = $16800,

New rate R = 24%,

  ( Y 1 C)( 1+r)+( Y 2 C)=$16800( 50,000C) ( 1.24)+( 50,000C)=$16,800112,0002.24C=$16,800

After rearranging this equation, the value of consumption and saving is derived:

C = $42500

S = $7500 (= $50,000-$42500).

Therefore, a rise in wealth leads to decrease the saving and increase the consumption.

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