Suppose That a Person Can Borrow and Lend at an Interest

question 53

Multiple Choice

Suppose that a person can borrow and lend at an interest rate of 10%.But there is a 5% rate of inflation and the person has to pay an income tax of 30% on all interest income.If the person borrows money, he can deduct interest as an expense.Where current consumption is on the horizontal axis and future consumption is on the vertical axis, the budget line will

• A)have a kink at the point of no saving or lending.
• B)be a straight line with a slope of about -1.02.
• C)be a straight line with a slope of about -1.05.
• D)be a straight line with a slope of about -1.35.
• E)None of the above.

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Definitions:

Long Run

A period in which all factors of production and costs are variable, and firms can adjust all inputs.

Inputs Fixed

Refers to factors of production (like capital and land) that remain constant in quantity, regardless of the level of output.

Inputs Variable

Factors of production such as labor, land, and capital that are used to create goods and services.

Long-Run Adjustment

A process businesses undergo to alter their level of output in response to economic changes, ensuring long-term economic efficiency and resource allocation.