Suppose That an Individual Anticipated That the Next Calendar Year's

question 45

Multiple Choice

Suppose that an individual anticipated that the next calendar year's income would be $1,000 higher than this year's. Facing a real interest rate of 0 percent and a 20-year planning horizon, you would expect her annual real consumption to

• A) increase by $900 if the increase were permanent and $90 if it were a one-shot deal.
• B) increase by $1,000 if the increase were permanent and $100 if it were a one-shot deal.
• C) increase by $950 if the increase were permanent and $50 if it were a one-shot deal.
• D) remain the same for one year and then increase by $1,000 if the increase were permanent and by $50 if it were temporary.
• E) none of the above.

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Definitions:

Property Held In Fee

A form of ownership where the owner has complete control over the property and can use, enjoy, or dispose of it at will; often referred to as fee simple ownership.

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