In the two-period model, suppose a household's income in the first period is $40,000, income in the second period is $50,000, and the real interest rate is 25 percent.What is the maximum amount that the household would be able to spend in the first period?
A)$40,000
B)$50,000
C)$80,000
D)$100,000

Question

Quizplus · Accepted Answer

The maximum amount the household can spend in the first period is calculated by adding the first period's income to the present value of the second period's income. The present value of the second period's income is $50,000 / (1 + 0.25) = $40,000. Therefore, the maximum amount available to spend in the first period is $40,000 (first period income) + $40,000 (present value of second period income) = $80,000.

In the Two-Period Model, Suppose a Household's Income in the First