When Analyzing How Borrowing and Lending Affect the Consumer's Budget

question 3

Multiple Choice

When analyzing how borrowing and lending affect the consumer's budget constraint, we measure spending in the current time period on the horizontal axis and spending in the future time period on the vertical axis. Assume that the interest rate at which the consumer can lend and borrow is 10% and income in period 1 is $1000 while income in period 2 is $1200. The point of maximum future consumption can be expressed as

• A) 1000 + 1200/1.1.
• B) 1000(1.1) + 1200.
• C) 1000+1200+.1.
• D) 1000/1.1 + 1200/1.1 + 1.

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Definitions:

Illegal

That which is forbidden by law; activities or actions that are against statutory laws and regulations.

Unenforceable

A contract or clause that cannot be executed by the judicial system because it violates laws or regulations or because it lacks certain essential elements.

Mentally Incompetent Persons

Individuals who are legally recognized as incapable of managing their own affairs or making decisions due to mental incapacity.

Valid

A term that signifies something is legally sound and has effect or force.