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II Problem. Suppose Monnie Market can choose between expenditures today and expenditures tomorrow. She has $10,000 in assets and an income today of $75,000. Given the state of the economy, she expects no raise next year. Current interest rates are 2%. The price of consumption is $1000. Uh oh, the government has just intervened and raised interest rates to 6%. a. Write the equations representing Monnie’s resources in year 1 and year 2. Calculate total resources in year 1 and year 2. b. Graph Monnie’s budget line. What is the slope? (You must use graph paper) c. Identify clearly on your graph how much Monnie could consume if she spent only her current income; her current income and assets; the range of consumption available if she borrows. What is the maximum size of a loan she can obtain? d. Redraw the budget line on another graph. Draw in an indifference curve representing the fact that Monie’s is present oriented (she is a borrower), Ceteris Paribus. Clearly identify what the optimal quantities of consumption are in year 1 and year 2, based on where you drew your IC.
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