Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 4, Problem 8NP
a)
To determine
The consumer’s PVLR.
b)
To determine
The equation for the consumer’s budget constraint and graph the budget line.
c)
To determine
The saving and consumption in the current period.
d)
To determine
The change in saving and consumption when current income increases by 11.
e)
To determine
The change in saving and consumption when future income increases by 11.
f)
To determine
The change in saving and consumption when initial wealth increases by 11.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose that
y =100 (income today)
• y' = 150 (income tomorrow)
10% (interest rate on bonds)
%3D
r =
• t = 10 (taxes today)
• t' = 10 (taxes tomorrow)
Suppose that c = 100. Is the consumer borrowing or saving, today? And what will her budget constraint look tomorrow?
The consumer is borrowing.
Her budget constraint tomorrow will be
c' = 150 -10 - 10*(1.1) = 129
The consumer is saving.
Her budget constraint tomorrow will be
c' = 150 -10 + 10*(1.1) = 151
O The consumer is neither borrowing nor saving - she is breaking even.
Her budget constraint tomorrow will be
c' = 150 -10 = 140
O The consumer is saving.
Her budget constraint tomorrow will be
c' = 150 + 10*(1.1) = 161
%D
assume you are given a $100 raise, and
decide to save $20 of that money. also
assume that if you make zero income in a
year, you will still spend $7000.
a.) what is your consumption function?
b.) if you earn $20000 in a year how much will
you spend?
c.) will you be able to save while earning the
above income?
A consumer's current income (y) is 200 and the future income ( t.') is 240. A current lump sum tax (t) of 10 is paid and the tax in the next period (t) is 15. The real interest rate is 20% for each period. Please assume that current and future consumption are complements. and the consumer always prefers to have one unit of current consumption and two units of consumption in the future.
Calculate the optimal current and future consumption and the optimal current and future savings. Is the consumer a lender or a borrower? How does he she. as a lender or a borrower. affect the future consumption?
Chapter 4 Solutions
Macroeconomics
Ch. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 8RQCh. 4 - Prob. 9RQCh. 4 - Prob. 10RQ
Ch. 4 - Prob. 1NPCh. 4 - Prob. 2NPCh. 4 - Prob. 3NPCh. 4 - Prob. 4NPCh. 4 - Prob. 5NPCh. 4 - Prob. 6NPCh. 4 - Prob. 7NPCh. 4 - Prob. 8NPCh. 4 - Prob. 9NPCh. 4 - Prob. 1APCh. 4 - Prob. 2APCh. 4 - Prob. 3APCh. 4 - Prob. 4APCh. 4 - Prob. 5APCh. 4 - Prob. 6APCh. 4 - Prob. 7APCh. 4 - Prob. 5WWMDCh. 4 - Prob. 6WWMD
Knowledge Booster
Similar questions
- 1) Suppose your annual income is $73,000 this year and it is expected to increase 30% next year. The market interest rate is 4%. a) Please illustrate all possible consumption patterns with a figure. Do not forget to label your axes. b) You believe that your consumption this year and your consumption next year should be the same. If you follow your plan and consume equally in those two years, how much should you save or borrow this year?arrow_forwardQUESTION 1An individual lives for two periods and decides how much to consume in each period.- In the first period his consumption equals C1 and his income Y1 = 200- In the second period his consumption equals C2 and his income Y2 = 100He can save or borrow money in the first period to finance his consumption in the second period.The interest rate he gets in case he saves or has to pay in case he borrows money equals 7%.Determine the budget constraint of this individual. C2 = −0.935·C1 +314C2 =−1.07·C1 +314C2 =−0.8·C1 +314C2 =−1.08·C1 +314 QUESTION 2The total production of a good y is determined by the production function y = 3L2/3K1/3, where L is labour input and K capital input.The reward (factor prices) for labour and capital are, l = 27 en r = 2, respectively.The producer needs to produce 9000 units of good y.How much units of labour will he hire if he wants to miminize his total costs? 1587,4839,953000515,23 QUESTION 3A good is traded on a perfectly competitive…arrow_forwardSuppose that c= a+by, where c= consumption, a = consumption at zero income, b = the slope of the consumption from function, and y = income, a) are c and y positively related or are they negatively related? b) If graphed, would the curve of this equation slope upward or downward? c) What is the value of c if a = 10, b = 50 and y = 200? d) what is the value of y if c = 100, a = 10 and b = 25?arrow_forward
- Assume an intertemporal budget constraint that shows how consumption can be traded off between two periods, t and t+1. Assume the consumer can save and borrow at the same interest rate of 10%. Assume the consumer collects income of $100 in each period. To gain an extra $10 dollars in period t+1, what must the consumer give up in period t? 11 10 1 10arrow_forward“Permanent Income of consumption is just the average of all current and future incomes. Thus, one does not need to do the maximisation of intertemporal utility”. True or False. Discuss according to the model. Note that you need to discuss according to the model?arrow_forward1) Sandeep consumes (c1, c2) and earns (m1, m2) in periods 1 and 2 respectively. Suppose that the interest rate is r. a) Write down Sandeep's intertemporal budget constraint in present value terms. b) If Sandeep does not consume anything in period 1, what is the most he can consume in period 2?arrow_forward
- Equation for consumption is C=40/(0.8Y) where Y= yearly income = $400. A) what is the level of consumption B) what is the average propensity to consumearrow_forwardConsumption Function Suppose that a country's consumption function is given by C=(9\sqrt(I)+0.8\sqrt(I^(3))-0.3I)/(\sqrt(I)) where C and I are expressed in billions of dollars. (a) Find the marginal propensity to save when income is $25 billion. (b) Determine the relative rate of change C with respecy to I when income is $25 bilion.arrow_forwardEconomics Assume you are 20 year old, with zero initial wealth, planning to work until the age of 50 and expecting to live to age of 75. You are expected to earn a constant annual salary of €70,000. Task: estimate lifetime consumption Now, suppose your €10,000 transitory increase to your income in your first year of work, what happens to your lifetime income?. What is the magnitude of the transitory MPC, which completely smooths income?arrow_forward
- Course: Introduction to Microeconomics Topic: Intertemporal Consumption DecisionsA consumer makes decision to consume in this year and next year. This year she has an income of M1 = $ 1.5 million and next year her income will be M2 = $ 2.75 million. Interest rate is 10%. Her intertemporal preferences are represented by function U(c1, c2) = c1*c2, whose intertemporal marginal rate of substitution is IMRS = c2/c1.a) Find and graph Budget Constraintb) Find and graph optimal consumption basket and indicate whether the consumer SAVES or BORROWS in the FIRST YEAR.c) Indicate whether following statement is true or false: "Any increase in interest rate will cause a decrease in consumer's welfare" Justify.d) If next year's income is maintained, how much would this year's income have to be for consumer to neither save nor borrow money at 10% interest rate?e) How much would interest rate have to be for consumer to consume exactly her initial endowment (M1 = $ 1.5 million and M2 = $ 2.75…arrow_forwardUse the graphs to illustrate the effect of a decrease in consumer income expectations on the consumption (C) function and the savings (S) function. Real consumption 500 450 400 350 300 250 200 150 100 50 0 0 50 C = DI с 100 150 200 250 300 350 400 450 500 Real disposable income (DI) Real savings 500 450 400 350 300 250 200 150 100 50 0 -50 -100 -150 0 50 100 150 200 250 300 350 Real disposable income (DI) S 400 450 500arrow_forwardConsider a two-period consumption saving model and let f1 and f2 denote the first and secondperiod consumption, respectively. Assume that the interest rate at which the consumer may lend or borrowis 10%. Suppose that a consumer’s utility function is x (f1> f2) = f1 + 20√f2= The consumer first periodincome is L1 = $100 and the present value of her income stream is $330=(a) What is the optimal consumption stream (consumption bundle) of this consumer?(b) Is this consumer borrower or lender? How much does she borrow or lend?(c) What is the effect of a reduction of the interest rate to 5% on the consumer’s optimal first-periodsaving? (Make sure to take into account the effect of the decline in the interest rate on the present value ofthe consumer’s income stream.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education