Sally Will Earn $30,000 This Year and $40,000 Next Year

question 70

Essay

Sally will earn $30,000 this year and $40,000 next year.The real interest rate is 20% between this year and next year; she can borrow or lend at this rate.She has no wealth at the start of this year and plans to finish next year having consumed everything she possibly can.She would like to consume the same amount this year as next year.The inflation rate is 0%.
(a)How much should Sally save this year? How much will Sally consume in each of the two years?
(b)How would your answers change if the real interest rate was 40%?

---

Definitions:

Peristalsis

The involuntary constriction and relaxation of the muscles of the intestine or another canal, creating wavelike movements that push the contents forward.

Sartorius

A long narrow muscle of the thigh; the longest muscle of the body.

Duchenne's

Often referring to Duchenne muscular dystrophy, a genetic disorder characterized by progressive muscle degeneration and weakness.

Erb's

Refers to Erb's palsy, a condition caused by nerve damage around a baby's neck, which can lead to weakness or loss of movement in the arm.