Assume Marco is initially borrowing and investing 100, with a return on investment of 50% and an interest rate on borrowing at 10%. The return on investment falls to 5%. Which statements are correct? Select one or more: A. Marco’s decision to continue to invest will depend on his preference between consumption today and consumption in the future. B. Marco will wish to invest and borrow, but he will be worse off than when the return to investment was 50%. C. If he continues to invest and borrow, the dashed line representing his new frontier will start at 105 on the y axis and be shallower than the solid red line, so he’ll continue to invest and borrow D. In the remaining questions, assume the central bank now cuts interest rates so that the real interest rate falls to zero. Marco will still not wish to invest and borrow. E. If he just invests his money in the bank instead, his frontier will cross the x axis at 100 and be steeper than the frontier if he invests. So he will stop investing and put his money in the bank. F. If he continues to invest and borrow, the dashed line representing his new frontier will start at 105 on the y axis and be steeper than the solid red line. He will not want to borrow, but will still be better off investing, so he will continue to invest.
Assume Marco is initially borrowing and investing 100, with a
Select one or more:
Marco’s decision to continue to invest will depend on his preference between consumption today and consumption in the future.
If he continues to invest and borrow, the dashed line representing his new frontier will start at 105 on the y axis and be shallower than the solid red line, so he’ll continue to invest and borrow
In the remaining questions, assume the central bank now cuts interest rates so that the real interest rate falls to zero. Marco will still not wish to invest and borrow.
If he just invests his money in the bank instead, his frontier will cross the x axis at 100 and be steeper than the frontier if he invests. So he will stop investing and put his money in the bank.
If he continues to invest and borrow, the dashed line representing his new frontier will start at 105 on the y axis and be steeper than the solid red line. He will not want to borrow, but will still be better off investing, so he will continue to invest.
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