Consider the Budget Constraint Between "Spending Today" on the Horizontal

question 103

Multiple Choice

Consider the budget constraint between "spending today" on the horizontal axis and "spending a year from today" on the vertical axis.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.Suppose now that the interest rate increases to 40%.What happens to the slope of your budget constraint relative to when the interest rate was $25%?

• A)it becomes steeper
• B)it becomes flatter
• C)it doesn't change because the budget constraint shifts in parallel to the original budget constraint
• D)it doesn't change because the budget constraint shifts out parallel to the original budget constraint

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