Abby lives in a world with two time periods. Her income in each period is $460.

Question

Abby lives in a world with two time periods. Her income in each period is $460. Suppose there is no borrowing constraint.
A. If the interest rate is 15% for the time period for both borrowing and saving, what is the maximum she can borrow against her future income?
B. What is the present value of lifetime resources available to Abby?
C. If the interest rate drops to 10% for both borrowing and saving, what is Abby's new present value of lifetime resources? Compare to the above.

Answer fully and include work for 5 stars.

Explanation / Answer

A ) income in each period is $460

let P be the maximum she can borrow

so P =460/(1+0.15) +460/(1+0.15)2

=$747.83

B)
present value of abby's sources is same as in part A that is

= 460/(1+0.15) +460/(1+0.15)^2 =747.82

C)
present value if rate drops to 10%

=460/(1+0.1) +460/(1+0.1)2 =$798.35

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