Question

2 A consumer is making lifecycle consumption plans for two periods (this year and next year. The consumer's current income after taxes is $100,000. She knows that her real income after taxes will be $121,000 in next year. She can borrow and lend freely at an annual real interest rate of 10%. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). A) If the consumer wants to consume the same amount of consumption this year and next year, then how much should she consume each period? B) If the consumer wants to consume next year twice as much as the consumption of this of this year, then how much should she or save this year? (hint: if this year consumption is the next year consume each period? Does she borrow or save this year? (hint: if this year consum consumption is 2x.)

Answer 1

We know that, a + C2 (179) Y + Y (!+ G = This year's Consumption C2 = Nex period's Consumption (Next year) y = This persods (year) income in real terms. G = Next year's real ancome. we have y, = 101000 100,000 Y 2 = 1,21,000 4= 0! G+ (2. (1+ool) = 100,000 + 121000 (1+0. G+ (a = 100,000 + 110,000 (11) Gt (2 = 210,000 (121) C+0.91= 210,000 (a) G=C2 (1-91) 9 = 210,000 G= 210,000 fi G=109,947.64 Срот и воог бижу ад ся

(6) This year = Next year=20, G+ 0.91(201) = 9, 10,000 2.82 C = 2,10,000 el = 2,10 Ovo 9.82 G = 74,468.08 G = 148,936.16 Consumer is now saver period appoon) Capposse) in this 174,468.08 €400,000