1---consider a consumer who earns income each month. person has to spend each month on essential goods, such as food and personal. person has no access to reliable savings, so person must spend her entire income each month. The consumer is interested in taking a loan to finance a large purchase. The cost of capital for banks is fixed at each
1---consider a consumer who earns income each month. person has to spend each month on essential goods, such as food and personal. person has no access to reliable savings, so person must spend her entire income each month. The consumer is interested in taking a loan to finance a large purchase. The cost of capital for banks is fixed at each month and the monthly interest rate charged to borrowers is . Both and are equal to one plus the interest rate as we are used to seeing it – e.g., if a loan charges 5% monthly interest, then = 1.05
2---What is the largest nonessential purchase that the consumer can make each month without borrowing? Express it as a function of y c
3--Under the zero profit condition for lenders (i.e. banks), what will the interest rate charged to borrowers be? Assume there is no risk of default and no fixed costs and express it as a function of(capital k), y,c
4--What is the borrower’s monthly disposable income (exclusive of essential purchases) with a loan, under the assumptions mentioned above? Express your answer as a function of(capital k), y,c and the loan amount .
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