Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose that there are only 10 individuals in the economy each with the following utility function over present and future consumption:U(c1,c2)=c1+(2/3)c2 , wherec1is consumption today,

Suppose that there are only 10 individuals in the economy each with the following utility function over present and future consumption:U(c1,c2)=c1+(2/3)c2 , wherec1is consumption today, andc2is consumption tomorrow. Consumption tomorrow is less valued because people are impatient and prefer consuming now rather than later. Buying 1 unit of consumption today costs $1 today and buying 1 unit of consumption tomorrow costs $1 tomorrow. All individuals have income of $10 dollars today and no income tomorrow (because they will be retired) but they can save at the market interest rater0 .

1). Suppose that in this economy all the funds for capital come from savings by the 10 individuals. Firms' demand for capital is given byQD=100100r .

a. What is the market supply, QS, for funds if the interest rate is 30%?

b.What is the market supply for funds if the interest rate is 70%?

c.What is the equilibrium interest rate that clears the capital market?

d.What is aggregate consumption in each period, c1 and c2, at that interest rate?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Reporting And Analysis

Authors: Lawrence Revsine, Daniel Collins

5th Edition

0078110866, 978-0078110863

More Books

Students also viewed these Economics questions

Question

5. Give some examples of hidden knowledge.

Answered: 1 week ago