Please answer question 8-a Section C - Theory, Policy, and Evidence8.A typical worker will earn £300k in their youth and £600k in middle-age. Over theirlifetime, they must choose between two "goods": consumption in their youth andconsumption in middle-age.When young, the worker has the option of putting their earnings in the bank at aninterest rate of 0% - these savings can then be spent in middle-age. Alternatively, theycan borrow money from the bank when young. This loan must be paid back inmiddle-age at a 100% interest rate.(a) What is the maximum amount of money the worker can borrow when young?(b) Draw a large graph with "consumption when young" on the vertical axis and"consumption in middle-age" on the horizontal axis. Represent the worker'sbudget set. Note: both axes should be labelled from £0 to £1,000k.(c) The government wishes to stimulate spending, and writes a law to reduce theinterest rate from 100% to 0%. On the same graph, show the effect of thispolicy on the worker's budget set.Show the effect of this change on consumption for someone who was aborrower before the policy, breaking the total change into income andsubstitution effects.Assume that "consumption when young" and "consumption when middle-aged" are both normal goods. Further assume that if income and substitutioneffects work in opposite directions, the substitution effect is stronger.

A loan is a quantity of money that is provided by a lender to a borrower with the expectation that…

8. A typical worker will earn £300k in their youth and £600k in middle-age. Over their lifetime, they must choose between two "goods": consumption in their youth and consumption in middle-age. When young, the worker has the option of putting their earnings in the bank at an interest rate of 0% - these savings can then be spent in middle-age. Alternatively, they can borrow money from the bank when young. This loan must be paid back in middle-age at a 100% interest rate. (a) What is the maximum amount of money the worker can borrow when young?

8. A typical worker will earn £300k in their youth and £600k in middle-age. Over their lifetime, they must choose between two "goods": consumption in their youth and consumption in middle-age. When young, the worker has the option of putting their earnings in the bank at an interest rate of 0% - these savings can then be spent in middle-age. Alternatively, they can borrow money from the bank when young. This loan must be paid back in middle-age at a 100% interest rate. (a) What is the maximum amount of money the worker can borrow when young?

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter14: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 10CQ

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