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Unformatted text preview: amount of money you will have if you save it = $ M(1+r) Group Problem • Your income today is $2,000. Next year your income will be $1,100. Your utility from consumption now and next year is: • What is your optimal choice if the interest rate is 10%? • What is your optimal choice if the interest rate is 20% 2 1 2 1 ) , ( c c c c u = Practice Problem • You have $60 today and will earn $60 next period. You can borrow at a 200% rate of interest and you can lend/save at 0%. – Graph your intertemporal budget set – You have a chance to invest in a project to get $90 today and $45 next period. Should you? – What if the project paid $45 today and $90 next period? Problem • Your utility is: • Interest is 21%, m 1 = 2000, m 2 =1100 • Calculate optimal choice. } , min{ ) , ( 2 1 2 1 c c c c u =...
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 Spring '11
 MURRAY
 Macroeconomics, Inflation, Interest Rate, optimal choice, monetary payoff

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