Suppose Joe Earns $1,000 in Year 1 and $0 in Year

question 2

Essay

Suppose Joe earns $1,000 in year 1 and $0 in year 2.Any amount he saves will earn interest at a rate of 0%.Draw Joe's budget line.(Hint: He can either consume all $1000 this year or consume nothing this year and have $1,100 next year. )Assuming convex indifference curves,show that an increase in the rate of interest can cause Joe's savings to either increase or decrease.Explain in terms of income and substitution effect.

---

Definitions:

Debit Machinery

An accounting entry that reflects an increase in the value of machinery assets on the balance sheet.

Interest

The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

Present Value

The current worth of a future sum of money or stream of cash flows, given a specified rate of return.