490 PART SEVEN ADVANCED TOPIC plausible? Discuss. (Hint: Think about income and substitution effects.) 8. Suppose you take a job that pays $30,000 and set some of this income aside in a savings account that pays an annual interest rate of 5 percent. Use a diagram with a budget constraint and indifference curves to show how your consumption changes in each of the following situations. To keep things simple, assume that you pay no taxes on your income. a. Your salary increases to $40,000. b. The interest rate on your bank account rises to 8 percent. 9. As discussed in the text, we can divide an individual’s life into two hypothetical periods: “young” and “old.” Suppose that the individual earns income only when young and saves some of that income to consume when old. If the interest rate on savings falls, can you tell what happens to consumption when young? Can you tell what happens to consumption when old? Explain. 10. Suppose that your state gives each town $5 million in aid per year. The way in which the money is spent is currently unrestricted, but the governor has proposed
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