Question
As a financial analyst at Citibank, you want to help your client, John Smith, determine how to allocate his income and consumption over this year
As a financial analyst at Citibank, you want to help your client, John Smith, determine how to allocate his income and consumption over this year and next. Refer to the above graph. Point A is $800 and Point B is $880. The solid sloping line represents the opportunities for investment in the capital market. Suppose John Smith has $800 now available to support consumption in periods 0 (now) and 1 (next year). John wants to consume exactly the same amount in each period. a. What is the market interest rate ? (sample answer: 18.42%) b. How much will he consume this period ? (sample answer: $900.45)
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