Assume That We Are Modeling Inter-Temporal Consumption for a Typical

question 78

Multiple Choice

Assume that we are modeling inter-temporal consumption for a typical consumer. Further assume that we measure current consumption on the horizontal axis and future consumption on the vertical axis. A market exists where borrowing and lending can occur for a fixed interest rate, r. Now identify the statement that is false.

• A)When a consumer can lend or borrow at the same interest rate, the consumer's budget constraint is a straight line.
• B)When the rate at which a consumer can borrow is higher than the rate at which the consumer can lend, the consumer's budget constraint is composed of two straight lines with different slopes.
• C)When a consumer cannot borrow money or earn an interest rate for saving money, the consumer's budget constraint is a straight line.
• D)When a consumer has access to financial markets so that he/she can lend or borrow money, his/her budget constraint is expanded when compared to his/her budget constraint without access to financial markets.

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