Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Consider an individual with income of nothing in period 1 and $13!} in period 2. Assume the price of the {single} output is $1 in
Consider an individual with income of nothing in period 1 and $13!} in period 2. Assume the price of the {single} output is $1 in both periods. {a} The market intermt rate is 1%. Draw the individual's lifetime budget constraint. 1ilimit is the present value of their [lifetime] income? {b} Is the individual likely to be a saver or a borrower? {c} Suppose the market interest rate now rism to 20%. Draw the new budget line and compare it to the old one. Is the individual likely to save more or less [or borrow less or more}1 following the increase in the intermt rate? MCI. The price of a bond and its interest rate are {a} not related. {h} negatively related. [e] sometimes positively related and other times negatively related. (d) positively related. M02. Consider a bond that pmmises to pa}ir $100 a year1 forever. If the annual interest rate is constant over time1 then the price of the bond will {a} Fall over time. (h) Rise over time. [n] Not change over time. {d} None of the above [as it will depend on the circumstances). M03. If we see a person take a oertain payment equal to P :3- [l instead of a fair het, then we lmow that they are {a} riskloving. (h) skawmse. [a] risk-neutral. {d} An answer eaJmot be determined from this information
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started