Ms. Anderson has $60,000 income this year and $40,000 next year. The market interest rate is 10 percent per year. Suppose Ms. Anderson consumes $80,000 this year. What will be her consumption next year?

Question

Quizplus · Accepted Answer

Ms. Anderson consumes $80,000 this year, which is $20,000 more than her income of $60,000. To finance this, she borrows $20,000 at a 10% interest rate. Next year, she must repay $22,000 ($20,000 plus $2,000 interest). Her income next year is $40,000, so after repaying the loan, she will have $40,000 - $22,000 = $18,000 for consumption.

Ms Anderson Has $60,000 Income This Year and $40,000 Next