Consider the Budget Constraint Between "Spending Today" on the Horizontal

question 459

Multiple Choice

Consider the budget constraint between "spending today" on the horizontal axis and "spending a year from today" on the vertical axis. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose now that the interest rate decreases to 10%. What happens to the slope of your budget constraint relative to when the interest rate was 25%? The slope

• A)becomes steeper.
• B)becomes flatter.
• C)doesn't change because the budget constraint shifts in parallel to the original budget constraint.
• D)doesn't change because the budget constraint shifts out parallel to the original budget constraint.

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Definitions:

Consumer's Surplus

The difference between the total amount that consumers are willing and able to pay for a good or service versus the total amount that they actually pay.

Excess Demand

A situation where the quantity demanded of a good exceeds the quantity supplied at the current price.

Compensating Variation

Compensating variation is an economic concept that measures the amount of money one would need to reach their original level of utility after a price change or economic policy impact.

Price Increase

A rise in the cost of a good or service.