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Macroeconomics Three Questions

Question # 00035230
Subject: Economics
Due on: 12/08/2014
Posted On: 12/07/2014 11:57 PM

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1. Consumers typically pay a higher real interest rate to borrow than they receive when they lend (by making bank deposits, for example). Draw a consumers budget line under the assumption that the real interest rate earned on funds lent, r L , is lower than the real interest rate paid to borrow, rB . Show how this consumers budget line is affected by an increase in the initial wealth.

2. I) Draw the budget line and the relevant indifference curve for a consumer who is initially a borrower. Indicate the no-borrowing no-lending point (label it as N) and the optimal consumption point (label it as A).
II) Show the effect of an increase in the real interest rate on the budget line and the consumers optimal consumption. Using an intermediate budget line, show the income effect and the substitution effect on the current consumption and the future consumption. Specify whether these effects work in the same direction or the opposite directions?

3. Specify whether each statement is TRUE or FALSE. If you specify it as a FALSE statement, then briefly explain your reason.
a) If the future income increases, then the current consumption, saving, and the future consumption increase.
b) The slope of the budget line depends on the real interest rate and does not depend on the level of income.
c) There is a certain bundle of current consumption and future consumption which lies on the budget line at any rate of interest.
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Macroeconomics Three Questions Answers

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Posted On: 12/07/2014 11:58 PM
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Preview: borrower xx his xxxxxxx consumption is xxxx than its xxxxxxx income xxx xxxxxxx below xxxxx the no-borrowing xxxxxxxxxx point (label xx as xx xxx the xxxxxxx consumption point xxxxxx it as xxxxxxxxxxxxxx Show xxx xxxxxx of xx increase in xxx real interest xxxx on xxx xxxxxx line xxx the consumer’s xxxxxxx consumption Using xx intermediate xxxxxx xxxxx show xxx income effect xxx the substitution xxxxxx on xxx xxxxxxx consumption xxx the future xxxxxxxxxxx Specify whether xxxxx effects xxxx xx the xxxx direction or xxx opposite directions?Answer:When xxxx interest xxxx xxxxxx budget xxxx will become xxxxxxx It will xxxxxxxx two xxxxxxx xxxxxxxxxxxxxxx substitution xxxxxx and income xxxxxx Substitution effect xxxxxx due xx xxxxxx in xxxx interest rate xxxxxxx purchasing power xxxxxxxx When xxxx xxxxxxxx rate xxxxxx.....
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