Macroeconomics Three Questions

Question # 00035230 Posted By: expert-mustang Updated on: 12/07/2014 11:57 PM Due on: 12/08/2014
Subject Economics Topic Macroeconomics Tutorials:
Question
Dot Image
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.
Dot Image
Tutorials for this Question
  1. Tutorial # 00034549 Posted By: expert-mustang Posted on: 12/07/2014 11:58 PM
    Puchased By: 2
    Tutorial Preview
    The solution of Macroeconomics Three Questions Answers...
    Attachments
    Macroeconomics_Three_Questions_Answers.docx (143.5 KB)

Great! We have found the solution of this question!

Whatsapp Lisa