QuestionIn this hypothetical economy, there are twoconsumers living over two periods of life. Ann'sincomes are $50,000 in both periods.Meanwhile, Bob earns nothing in the firstperiod but $105,000 in the second period.Both of them can borrow or lend at the interestrate r. For simplicity, assume that there are notaxes.a)$50,000 in the first period and $50,000 in thesecond period. Write down the lifetime budgetAssume that both Ann and Bob consumeconstraint for each consumer then calculatethe interest rate r. Describe the economicbehaviour of each consumer.b)Suppose the interest rate increases.What will happen to Ann's consumption in thefirst period? Is Ann better off or worse off thanbefore the interest rate rises? Explain youranswer using an appropriate diagramc)What will happen to Bob's consumptionin the first period when the interest rateincreases? Is Bob better off or worse off thanbefore the interest rate increases? Explainyour answer using an appropriate diagram.

Answer: For Ann, Consumption in period 1 = c1 = 50000 , income = y1 = 50000 Let savings in period 1…

In this hypothetical economy, there are two consumers living over two periods of life. Ann's incomes are $50,000 in both periods. Meanwhile, Bob earns nothing in the first period but $105,000 in the second period. Both of them can borrow or lend at the interest rate r. For simplicity, assume that there are no taxes.

In this hypothetical economy, there are two consumers living over two periods of life. Ann's incomes are $50,000 in both periods. Meanwhile, Bob earns nothing in the first period but $105,000 in the second period. Both of them can borrow or lend at the interest rate r. For simplicity, assume that there are no taxes.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 4SCQ: Edna is living in a retirement home where home where most of her needs are taken care of, but she...

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