When analyzing how borrowing and lending affect the consumer's budget constraint, we measure spending in the current time period on the horizontal axis and spending in the future time period on the vertical axis. Assume that the interest rate at which the consumer can lend and borrow is 10%, income in period 1 is $1000 and income in period 2 is $1200. The point of maximum current consumption can be expressed as:
A) $1000 + 1200 / 1.1$.
B) $1000 ( 1.1 ) + 1200$.
C) $1000 + 1200 + .1$
D) $1000 / 1.1 + 1200 / 1.1 + 1$.

Question

When analyzing how borrowing and lending affect the consumer's budget constraint, we measure spending in the current time period on the horizontal axis and spending in the future time period on the vertical axis. Assume that the interest rate at which the consumer can lend and borrow is 10%, income in period 1 is $1000 and income in period 2 is $1200. The point of maximum current consumption can be expressed as: 
A) $1000 + 1200 / 1.1$.
B) $1000 ( 1.1 ) + 1200$.
C) $1000 + 1200 + .1$
D) $1000 / 1.1 + 1200 / 1.1 + 1$.

Quizplus · Accepted Answer

The point of maximum current consumption occurs when the consumer spends all of their period 1 and period 2 income in period 1. The income for period 2 is discounted by the interest rate (1.1) to convert it into period 1 dollars, hence $1000 + 1200 / 1.1$.

When Analyzing How Borrowing and Lending Affect the Consumer's Budget 1000+1200/1.11000 + 1200 / 1.11000+1200/1.1

When Analyzing How Borrowing and Lending Affect the Consumer's Budget $1000 + 1200 / 1.1$