The ray that connects the maximum one can consume in Year 0 with the maximum one can consume in Year 1 represents:
A) all the investment possibilities and has a slope equal to (1 + r).
B) all best consumption alternatives and has a slope equal to -(1 + r).
C) all the savings choices and has a slope equal to 1.
D) all the best consumption choices and has a slope equal to 1.

Question

Quizplus · Accepted Answer

This ray represents the trade-off between consumption in Year 0 and Year 1, taking into account the interest rate. The slope of -(1 + r) indicates that for each unit of consumption forgone in Year 0, consumption in Year 1 increases by (1 + r) units, reflecting the interest earned on savings.

The Ray That Connects the Maximum One Can Consume in Year