Now suppose Kenji can earn 50% real interest on any money he saves. Use the blue line (circle symbol) to plot his new budget constraint (BC₂) on the previous graph. Then use the grey point (star symbol) to plot his optimum consumption bundle at this interest rate. (Hint: To plot BC₁, think about how much money Kenji would have next year if he saved his entire income this year.) Using the previous graph, complete the following table by indicating how much Kenji should save of his current income when he cannot earn any interest on his savings and when he can earn 50% interest on his savings. Interest Rate Amount Kenji Saves (Dollars) (Percent) 0 50 Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? All consumers, including Kenji, save less money when interest rates are high, because they don't need to save as much money to have the same future income. In this case, Kenji saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high, In this case, Kenji saves less money when interest rates are high, However, consumers with different preferences might save more money when interest rates are high. O All consumers, including Kenji, save more money when interest rates are high, because they get a higher return on that investment.
Now suppose Kenji can earn 50% real interest on any money he saves. Use the blue line (circle symbol) to plot his new budget constraint (BC₂) on the previous graph. Then use the grey point (star symbol) to plot his optimum consumption bundle at this interest rate. (Hint: To plot BC₁, think about how much money Kenji would have next year if he saved his entire income this year.) Using the previous graph, complete the following table by indicating how much Kenji should save of his current income when he cannot earn any interest on his savings and when he can earn 50% interest on his savings. Interest Rate Amount Kenji Saves (Dollars) (Percent) 0 50 Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? All consumers, including Kenji, save less money when interest rates are high, because they don't need to save as much money to have the same future income. In this case, Kenji saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high, In this case, Kenji saves less money when interest rates are high, However, consumers with different preferences might save more money when interest rates are high. O All consumers, including Kenji, save more money when interest rates are high, because they get a higher return on that investment.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Now suppose Kenji can earn 50% real interest on any money he saves.
Use the blue line (circle symbol) to plot his new budget constraint (BC₂) on the previous graph. Then use the grey point (star symbol) to plot his
optimum consumption bundle at this interest rate. (Hint: To plot BC₁, think about how much money Kenji would have next year if he saved his
entire income this year.)
Using the previous graph, complete the following table by indicating how much Kenji should save of his current income when he cannot earn any
interest on his savings and when he can earn 50% interest on his savings.
Interest Rate Amount Kenji Saves
(Percent)
(Dollars)
0
50
Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior?
All consumers, including Kenji, save less money when interest rates are high, because they don't need to save as much money to have
the same future income.
In this case, Kenji saves more money when interest rates are high. However, consumers with different preferences might save less money
when interest rates are high.
In this case, Kenji saves less money when interest rates are high. However, consumers with different preferences might save more money
when interest rates are high...
O All consumers, including Kenji, save more money when interest rates are high, because they get a higher return on that investment.
Transcribed Image Text:12. Savings decisions
Kenji is a researcher who teaches classical mechanics at a university where he earns an annual salary of $160,000. He intends to take the next year
off to focus on writing a new undergraduate physics textbook, so he will not earn any Income next year. He is currently deciding how much of this
year's salary he should save for next year. Assume that there are no tax implications associated with the decision, and ignore what happens after next
year. Therefore, next year Kenji will consume whatever he saves this year plus interest, and he is not concerned with the future beyond next year.
The following graph shows Kenji's preferences for consumption this year and next year. Suppose Initially Kenji cannot earn interest on the money he
saves.
Use the green line (triangle symbol) to plot Kenji's budget constraint (BC1) on the following graph. Then use the black point (plus symbol) to show
his optimum consumption bundle.
Note: Dashed drop lines will automatically extend to both axes.
CONSUMPTION NEXT YEAR (Thousands of dollars)
288 289 288 89 R
240
220
200
100
100
140
120
100
00
60
0
0
20 40 60 80 100 120 140 160 180 200 220 240
CONSUMPTION THIS YEAR (Thousands of dollars)
BC, (0% Interest)
Initial Optimum (0% Interest)
-0-
BC, (50% interest)
New Optimum (50% interest)
?
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