Question

Consider a two-year period where a consumer has an income of $10,000 in year 1 and $8,000 in year 2. The consumer can borrow or lend at a rate of 10 percent. If the consumer decides to save $1,000 in year 1, it means:

Answer 1

The $1000 saved would be $1100 after one year and $1,210 after two years

Step-by-step explanation:

$1000 saved by the consumer in year 1 would equal a higher amount which is the future value when interest rate is 10%,in other words the future value is usually computed with the below formula:

FV=PV*(1+r)^N

PV is the amount saved which is $1000

r is the lending or borrowing rate of 10%

N is the time horizon for the investment which 1 year

FV=$1000*(1+10%)^1

FV=$1100

if the amount is reinvested in year 2 , the future value at the end of year 2 is as follows:

FV=$1100*(1+10%)^1

FV=$1,210