Suppose Olivia Is Planning for Retirement in a Two-Period World

question 221

Multiple Choice

Suppose Olivia is planning for retirement in a two-period world.In the first period Olivia is young and earns $1 million,and in the second period Olivia is old and retired and earns nothing.The interest rate is initially 10 percent,but then it falls to 7 percent.Which of the following statements is correct?

• A) After the interest rate falls,the substitution effect will induce Olivia to consume more when she is young.
• B) After the interest rate falls,the substitution effect will induce Olivia to consume less when she is young.
• C) After the interest rate falls,the income effect will induce Olivia to consume more when she is young.
• D) A change in interest rates affects the substitution effect but not the income effect.

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Definitions:

Cost Of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including materials and labor, used to determine gross profit.

Operating Expenses

Expenses incurred in the normal operation of a business, including costs such as rent, utilities, and payroll, that do not directly relate to the production of goods or services.

Profit Center

A profit center is a branch or division of a company that is directly responsible for generating its own revenue and profit.

Cost Center

A business unit that does not directly add to profit but still incurs costs, such as a human resources department.