Question

Ms. Newcastle has $60,000 income this year and $40,000 next year. The market interest rate is 10% per year (Ms. Newcastle can both lend and borrow at this rate). Suppose Ms. Newcastle wishes to consume $62,000 next year. What will be her consumption this year

Answer 1

$40,000

Step-by-step explanation:

Calculation to determine What will be her consumption this year

Using this formula

Consumption=Current Income-(Next year consumption-Next year income/1+Market interest rate)

Let plug in the formula

Consumption=$60,000-[($62,000-$40,000)/(1+.10)]

Consumption=$60,000-($62,000-$40,000/1.1)

Consumption=$60,000 - ($22,000/1.1)

Consumption=$60,000-$20,000

Consumption=$40,000

Therefore What will be her consumption this year is $40,000