Suppose you receive Y1 of your income this period and Y2 of your income in the next period. If you can either borrow or lend at an interest rate r, what is the most you can consume in the future period?
A)Y1(1 + r) + Y2
B)Y2(1 + r) + Y1
C)Y1/(1 + r) + Y2
D)Y2/(1 + r) + Y1

Question

Quizplus · Accepted Answer

The most you can consume in the future period is by saving all of your income from the current period (Y1) and letting it accrue interest at rate r, plus your income in the next period (Y2). This gives Y1(1 + r) + Y2.

Suppose You Receive Y1 of Your Income This Period and Y2