Suppose consumption in year 2 (C2) is on the horizontal axis and consumption in year 1 (C1) is on the vertical axis. How would an increase in the interest rate affect the consumer's choices? (which curve(s) would shift/change shape and how?) You may, but do not have to, draw a diagram

Suppose consumption in year 2 (C2) is on the horizontal axis and consumption in year 1 (C1) is on the vertical axis. How would an increase in the interest rate affect the consumer's choices? (which curve(s) would shift/change shape and how?) You may, but do not have to, draw a diagram

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter27: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 14CQ

See similar textbooks

Related questions

Q: Suppose that an increase in consumer confidence raises consumers’ expectations about their future…

A: Demand refers the total amount of goods and services that are willing and able to buy at the…

Q: Suppose Neha is a sports fan and buys only baseball caps. Neha deposits $3,000 in a bank account…

A: Real interest rate is an interest rate that has been adjusted to remove the effects of inflation.

Q: Q. 18 Dave deposits $2000 into the bank as deposits in 2016. The bank promises him a nominal…

A: Deposited - $2000 Nominal Interest rate = 5% = 0.05 Goods: 2 can of Coca-Cola 5 hamburgers

Q: Describe how interest could be good or bad, depending on the situation, and explain why interest…

A: If properly managed, a LOW INTEREST RATE can be beneficial. Low interest rates reduce demand for the…

Q: 1) Sandeep consumes (c1, c2) and earns (m1, m2) in periods 1 and 2 respectively. Suppose that the…

A: Answer: Given, Consumption=c1, c2Income=m1, m2Interest rate=r (a). Intertemporal budget constraint…

Q: When analyzing how borrowing and lending affect the consumer's budget constraint, we measure…

A: The consumer makes all the borrowing and lending decisions based on the interest rate. The interest…

Q: You initially invest $500 in a savings account that pays a yearly interest rate of 3%. (a) Write a…

A: We are going to understand the exponential and decade growth factor to answer this question.

Q: If the government wants to increase the amount of savings in the economy, how should it alter…

Q: Assume an intertemporal budget constraint that shows how consumption can be traded off between two…

A: We are going to use the concept of present value of the extra amount to be received in the next…

Q: How do changes in interest rate affect expected consumption? Interprete the effect of interest rate…

A: Precautionary Savings: This is a part of saving that is saved for consumption or use at a time of…

Q: At the beginning of the year, Savannah had $30 in savings and saved an additional $16 each week…

A: Savings is that part of income left after consumption expenditure and other obligations are deducted…

Q: explains interest rate and its determinants. Please explain is 3 paragraph

A: The policy which includes changes in the interest rate and open market operations to stabilize the…

Q: Which of the following two effects of a decrease in the tax rate on saving would raise savings?…

A: Answer - Need to find - Which of the following two effects of a decrease in the tax rate on saving…

Q: 1. When interest rate i increases, equilibrium output Y will _____. A. Increase B. Decrease C.…

A: Whenever interest rates are raised, investment will be discouraged due to the greater opportunity…

Q: The following table contains data on the relationship between saving and income. Rearrange these…

A: Savings represent that part of a consumer’s income which is not used for consumption and is not paid…

Q: The relationship between the price of the bond and the market rate of interest rate? * a. Inversely…

A: Par value of a bond is the amount you will get at the time of maturity of the bond The market price…

Q: How do people typically respond to higher real interest rates? by saving less by paying more taxes…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: a) When the demand of output decides how much to produce which type of demand prevails in the…

A: Ans. 4(a) Demand is defined as an economic principle that explains a consumer's desire to buy or…

Q: Explain, with the aid of a graph, the effect of an interest rate decrease on the (7) money market…

A: Money market consists of demand for money and money supply. Intersection of these two curves gives…

Q: Which of the following will both make people buy more? a. wealth rises and interest rates fall.…

A: People buy goods and services for their survival and satisfaction. They spend a part of their income…

Q: Consider that you were given a US savings bond that will pay $100 when it matures in ten years. What…

A: Bonds are tradable assets that are securitized versions of corporate debt issued by businesses.…

Q: In which of the following situations is it most advantageous to be saving? Select one: A. The real…

A: Inflation is basically an increase in the value of commodities and services over a certain period of…

Q: 1. A consumer, who is initially a lender, remains a lender even after a decline in interest rates.…

A: A decline in rates of interest would tend to make borrowing money cheaper that would encourage…

Q: What is the relationship; remember how economist talk about relationships, between the level of…

A: The equilibrium of the national income including the real GDP and the price level would be…

Q: Samantha Smoothie’s utility function is U(c1, c2) = c1c2, where c1 is her consumption in period 1…

A: Two Period of consumption model: There are two periods, i.e., 1 and 2 c1 -> consumption in period…

Q: Discuss any three factors that determine Interest Rates?

A: Interest rate is the rate at which the money is traded . Money is like a normal goods an interest…

Q: Consider an economy described by the following equations: Y = C + I + G Y = 5,000 G = 1,000 T =…

A: In equilibrium, Y = C + I + G

Q: Suppose that the interest rate is 4 percent. Instructions: Enter your answers rounded to 2 decimal…

A: Future value(FV) is the value of an asset at a future date like in this case the future value(FV) of…

Q: The disposable income from your part-time job in 2019 was $18,800. In 2018, you borrowed $700 at 14…

A: Disposable income is the after-tax income that can be used for investment, spending, and savings.

Q: On the following graph, use the orange points (square symbol) to plot the nominal interest rates for…

A: The real interest rate for 2014 can be calculated as follows: Thus the value of 2014 real interest…

Q: Suppose you received a US savings bond as a gift, and the bond pays $100 at maturity, which is ten…

A: Bond is a financial instrument that ensures a fixed income to the buyer or the investor.

Q: Question 3: Consider the following equation: 1 1 kt+1 = (1+ n)(1+g) 2+ p (1-a)k;ª How does a rise in…

A: Note:- Dear learner as you have asked multiple questions, As per our policy we will here solve only…

Q: 6. Which of the following would make the slope of the indifference curve between current consumption…

A: In economics, an individual's decision based on current and future consumption depends upon his…

Q: If the investment curve was horizontal and the prices increased? Explain what will happen to…

A: The AD curve shows an inverse relationship between the level of national income and the aggregate…

Q: Explain why an increase in the interest rate reduces the amount of residential investment

A: Interest rates impact the level the residential investment.

Q: Draw and explain a graph for a two-period consumer. Include the budget line, indifference curve,…

A: An expansion in the rate of interest will cause a clockwise pivot in the budget line as demonstrated…

Q: Suppose that the interest rate is 5 percent. Enter your answers rounded to 2 decimal places. A.…

A: Future vale refers to the amount today that will be worth at a certain point in the future

Q: Question 31 This person earns $1000 of income today and $2000 income next year. Point C represents…

A: Borrowing allows an individual to consume more they can afford using their current income. However,…

Q: In Class we considered the case in which the consumer can borrow and lend freely and the interest…

A: A Budget Constraint is defined as the all the combinations of goods and services a consumer can…

Q: What is the relationship; remember how economist talk about relationships, between the level of…

A: Economics is the study of various economic relationships. Relationship means it shows the connection…

Q: Patience has a utility function 1/2 1/2 U(cl, c2) = c² + 0.80c where c is her consumption in period…

A: Utility function U(C1,C2)=C1/21+0.801/22from this we get the slope of the utility…

Question

Suppose consumption in year 2 (C2) is on the horizontal axis and
consumption in year 1 (C1) is on the vertical axis. How would an increase
in the interest rate affect the consumer's choices? (which curve(s) would
shift/change shape and how?) You may, but do not have to, draw a
diagram.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

explain using a two period indifference curve how an individual would respond to an increase in interest rate by increasing or decreasing saving, explain using graphs
What are the major economic functions of the interest rate? How might the fact that many businesses fifinance their investment activities internally affect the effifi ciency with which the interest rate performs its functions?
How might a sudden increase in people’s expectationsof future real estate prices affect interest rates?
1. When interest rate i increases, equilibrium output Y will _____.A. IncreaseB. DecreaseC. Remain unchanged 2. When interest rate i decreases, equilibrium output Y will _____.A. IncreaseB. DecreaseC. Remain unchanged
How do changes in interest rate affect expected consumption? Interprete the effect of interest rate on expected consumption in the light of precautionary savings.
Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive, but it would in time lead to low prices for gasoline, electricity, and other types of energy. What effect would this have on interest rates? (Hint: which direction does demand curve shift? How does it change savings and investment in the economy?)
Q4 a) When the demand of output decides how much to produce which type of demand prevails in the economy? B) Why investment is negatively related to interest rate?c) Give the equilibrium in the market for loans?
APPLIED ECONOMICS Topic: Intertemporal Choice Levinn’s utility function is expressed as the following: U= C1 C2 0.3 where C1 is his first periodconsumption and C2 is his second period consumption. His income in the first period is$2500 and interest rate is at 10%. If at equilibrium, Levinn is neither a borrower nor a lender,then what is his expected income in the second period? Show the graph if possible
If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy? Explain it using simple sentences ( not more than 10).
Suppose that the interest rate is 5 percent. Enter your answers rounded to 2 decimal places. A. What is the future value of $100 four years from now? $ How much of the future value is total interest? $ b. By how much would total interest be greater at an interest rate of 7 percent than at an interest rate of 5 percent? $
APPLIED ECONOMICS Topic: Intertemporal Choice Levinn’s utility function is expressed as the following: U= C1 C2 0.3 where C1 is his first periodconsumption and C2 is his second period consumption. His income in the first period is$2500 and interest rate is at 10%. If at equilibrium, Levinn is neither a borrower nor a lender,then what is his expected income in the second period? Do not copy from others
suppose that Charlie faces the same choice, but he always integrates the gains or losses of both days regardless of how he chooses to check his investment. Also, assume now that if he decides to check at the end of each day, he has an additional option of pulling all his money out of the stock market at the end of the first day if he wishes. Would Charlie pull his money out at the end of the first day, if he finds that his investment has gone up by $3000? Explain. Would Charlie pull his money out at the end of the first day, if he finds that his investment has gone down by $1000? Explain. Given the investment decisions in Questions (2) and (3), which will he prefer, to check at the end of each day or to check only at the end of the second day?