Fred Is Considering Consumption Between Two Periods and Is Earning

question 47

Multiple Choice

Fred is considering consumption between two periods and is earning an income of $1,000 in both periods.If the interest rate is 8 percent,Fred borrows $500,but if the interest rate rises to 18 percent,Fred saves $500.Is this behavior economically reasonable?

• A)No,Fred would borrow less because of the higher interest rate but would still borrow a positive amount.
• B)No,Fred might not borrow at all,but would not start saving.If Fred wanted to save he would have saved at the lower interest rate too.
• C)Yes,the change in interest rates will cause his endowment point to shift,allowing him to become a saver.
• D)Yes,the higher interest rate will raise the cost of current consumption,inducing him to cut back current consumption.He could cut back so much that he becomes a saver.

---

Definitions:

Reference Group

A social group that serves as a point of reference in making evaluations or decisions.

Individuals

Refers to single human beings, as opposed to groups or collectives, highlighting the unique characteristics and experiences of each person.

Own Accomplishments

The achievements or successes that an individual personally attains through their efforts, skills, or talents.

South Asian

Refers to people, cultures, languages, and other phenomena originating from the southern region of Asia, typically including countries like India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives.