925 7:23 PM MI\'S 5. (14 points second year (so SO of wages in the ) In a fake w
ID: 1141851 • Letter: 9
Question
925 7:23 PM MI'S 5. (14 points second year (so SO of wages in the ) In a fake world, Paul lives only two years, he earns $90,000 wages in the first year and he is retired in years account which the earned interest. second year). In the first year, any wages that he does not spend is put in a savings including e will spend allof earns 6% interest. In the second year he will spend all of the money from his savings account, a) Write an equation variable (letter) in your equation. representing Paul's intertemporal budget constraint. You MUST carefully and clearty define b) Paul spends exactly S50,000 in the first year. How much does he spend in the second year? (You must show your calculations to receive any credit for your answer).Explanation / Answer
a) Paul's Intertemporal Budget constraint equation is
Y1= C1+C2/(1+r)
Y1=Earnings in Year 1
C1=Consumption in year 1
C2=Consumption in year 2
r=Rate of interest
b)
Y1= C1+C2/(1+r)
90,000=50000+C2/(1+.06)
40,000(1+.06)=C2
40000+2400=C2
42400=C2
Paul will spend $42,400 in second year.
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