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:

Adjusting Entries

Journal entries made at the end of an accounting period to update account balances for accruals and deferrals that are not recorded through regular transactions.

Accruals

Accruals are accounting adjustments for revenues and expenses that have been earned or incurred but not yet recorded in accounts due to the timing of cash flows.

Prepayments

Payments made in advance for goods or services, recorded as assets on the balance sheet until the actual goods or services are received.

Revenue Recognition

Revenue recognition is the accounting principle that outlines the specific conditions under which revenue is recognized or accounted for, typically when goods or services are delivered and the payment is assured.