Economics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 7

Jamie is saving for a trip to Europe. She has an existing savings account that earns 2 percent interest and has a current balance of $4,500. Jamie doesn't want to use her current savings for vacation, so she decides to borrow the $1,500 she needs for travel expenses. She will repay the loan in exactly one year. The annual interest rate is 5 percent.
a. If Jamie were to withdraw the $1,500 from her savings account to finance the trip, how much interest would she forgo? b. If Jamie borrows the $1,500, how much will she pay in interest?
c. How much does the trip cost her if she borrows rather than dips into her savings?