Asked by Adrian Lukmanto on Jun 24, 2024
Verified
Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Consider the budget constraint between "spending today" on the horizontal axis and "spending a year from today" on the vertical axis. What is the slope of this budget constraint?
A) −0.75
B) −1.00
C) −1.25
D) −2.25
Budget Constraint
The restriction on the assortment of goods and services a consumer is able to purchase, determined by their income and the costs of those items.
- Perceive the impact of interest rate shifts on savings and consumption patterns across several periods.
- Investigate and explicate the concepts of indifference curves as well as budget limitations.
Verified Answer
TK
Tania KatherinJul 01, 2024
Final Answer :
C
Explanation :
The slope of the budget constraint is determined by the interest rate for borrowing or saving. With a 25% interest rate, $1 saved today becomes $1.25 a year from today, and $1 borrowed today needs $1.25 to repay in a year. Thus, the slope, which represents the trade-off between spending today and a year from today, is -1.25.
Learning Objectives
- Perceive the impact of interest rate shifts on savings and consumption patterns across several periods.
- Investigate and explicate the concepts of indifference curves as well as budget limitations.