Rachel earns nothing during her learning period,1100 during her working period,and nothing during her retirement period.She has initial assets of 300.The real interest rate is zero.Rachel is not allowed to borrow by the banks.Whenever possible,Rachel wants to smooth consumption between periods.How much will she save during her working period?

Question

Quizplus · Accepted Answer

Since Rachel wants to smooth consumption between periods, she will consume the same amount during her learning and retirement periods, so her consumption during each of these periods will be:

C_learn = C_retire = 300/2 = 150

During her working period, her total consumption will be:

C_total = C_learn + C_working + C_retire
1100 = 150 + C_working + 150
C_working = 800

Since Rachel cannot borrow, her savings during her working period will be:

Savings = Income – Consumption
Savings = 1100 – 800
Savings = 300

Therefore, Rachel will save 300 during her working period, and the best choice is B.

Rachel Earns Nothing During Her Learning Period,1100 During Her Working