Question

QUESTION 9 An individual is considering consumption in two periods. He has decided to borrow $1,000 in period 1, given his endowment and the interest rate. Other things remaining the same, if the interest rate increases, he will: A borrow more than $1,000. B. borrow more or less depending upon whether or not the substitution effect of the change is greater than the income effect C. borrow less than $1,000. D. continue to borrow $1,000. QUESTION 10 Fred is considering consumption between two periods and is earning an income of $1,000 in both periods. If the interest rate is 8 percent, Fred borrows $500, but if the interest rate rises to 18 percent, Fred saves $500. Is this behavior A. Yes, the higher interest rate will raise the cost of current consumption, inducing him to cut back current consumption. He could cut back so much that he becomes a saver B. No, Fred would borrow less because of the higher interest rate but would still borrow a positive amount. C. No, Fred might not borrow at all, but would not start saving. If Fred wanted to save he would have saved at the lower interest rate too. ○ D. Yes, te change in interest rates will cause his endowment point to shift, allowing him to become a saver. QUESTION 11 In a two-year period, suppose Gloria has $10,000 in income in year 1 and $4,300 in income in year 2. In order to maintain her optimal consumption of $8,000 in year 1 and S6,500 in year 2, she can borrow or lend at a rate of 10 percent. If Gloria's income stream changes such that she earms $3,000 in Year 1 and $13,000 in Year 2, the budget line will: A. pivot about the endowment point. B. remain unchanged. pivot about the intercept on the axis representing year 2 income. D. shift out away from the origin. QUESTION 12 In a two-year period, if a higher interest rate causes c in year 1 to fall: the income effect associated with the higher interest rate is greater than the substitution effect. 3 the income effect of the higher interest rate is negative. the substitution effect of the higher interest rate is positive. the substitution effect associated with the higher interest rate is greater than the income effect.