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:

Chronological Order

An arrangement of events in the order they occurred in time.

Long Sentences

Written or spoken expressions that are extended in length, potentially making them harder to read or understand.

Complex Ideas

Concepts or thoughts that involve multiple interconnected elements, requiring significant understanding or analysis.

Telepathic

Relating to the supposed ability to communicate thoughts directly from one mind to another without speaking or writing.