O'Roberts receives a cash prize of $3,000 and is trying to decide how much money to invest at an interest rate of 5 percent and how much to spend now.Consider his intertemporal budget constraint where future interest income is measured on the vertical axis.If the interest rate were 7 percent instead,his budget constraint would
A)rotate inward along the vertical axis.
B)rotate inward along the horizontal axis.
C)rotate outward along the vertical axis.
D)rotate outward along the horizontal axis.

Question

Quizplus · Accepted Answer

When the interest rate increases from 5 percent to 7 percent, the amount of future interest income that can be earned from any given level of investment increases. This means that for the same amount of money invested today, O'Roberts would earn more in the future, effectively shifting or rotating the budget constraint outward along the vertical axis, which represents future income. This outward rotation reflects the increased capacity to consume in the future due to the higher interest rate.

O'Roberts Receives a Cash Prize of $3,000 and Is Trying