The next questions refer to the following.
Current income is 300, expected future income is 363, and the interest rate is 10%.
-If current income remains 300,while expected future income rises by $63,then maintaining equal consumption across time requires consumption to be
A) 330
B) 340
C) 350
D) 360
E) 370

Question

Quizplus · Accepted Answer

In order to maintain equal consumption across time, we need to account for the interest rate of 10%. This means that we need to increase our consumption by 10% to account for the time value of money.

Current consumption = 300 
Expected future consumption = 363 
Increase in future consumption = 63

To find the required consumption to maintain equal consumption across time, we can use the following formula:

Current consumption / (1 + i) = Future consumption / (1 + i)

where i = interest rate

Substituting the values, we get:

300 / (1 + 0.1) = (363 + 63) / (1 + 0.1) 
300 / 1.1 = 426 / 1.1 
273.97 = 386.36

Thus, we need to increase our consumption from 300 to 360 (rounded to the nearest dollar) to maintain equal consumption across time. Therefore, the answer is D) 360.

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