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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