a)
The consumer’s saving and consumption.
a)
Explanation of Solution
A consumer is making saving plans for this year and next year.
Let her income is Y, saving is S, and consumption is C, which is same in both the years.
Income in year 1 is Y1.
Income in year 2 is Y2.
The consumer’s saving in the 1st year is Y1-C
The consumer’s saving in second year is Y2-C.
Saving the 1st year earn interest rate R%.
Let consumer pay X amount as tuition fee.
Then, the mathematical expression for tuition fee would be:
Given,
Y1 = Y2 = $50,000,
X = $16,800,
R = 10%,
After rearranging this equation, the value of consumption and saving is derived:
C = $42,000
S = $8,000 (= $50,000-$42000)
b)
The change in saving and consumption when consumer’s current income rises from $50,000 to $54,200.
b)
Explanation of Solution
New income Y1 = $54,200,
Y2 = $50,000
X = $16,800,
R = 10%,
After rearranging this equation, the value of consumption and saving is derived:
C = $44,200
S = $10,000 (= $54,200-$44200).
Therefore, a rise in current income decreases the saving and increases the consumption.
c)
The change in saving and consumption when consumer’s expected income rises from $50,000 to $54,200 next year.
c)
Explanation of Solution
Y1 = $50,000
New expected income, Y2 = $54,200,
X = $16800,
R = 10%,
After rearranging this equation, the value of consumption and saving is derived:
C = $44,000
S = $6,000 (= $50,000-$44000).
Therefore, a rise in future income decreases the saving and increases the consumption.
d)
The change in saving and consumption when during the current year consumer receives an inheritance of $1050 (an increase in wealth, not income).
d)
Explanation of Solution
Y1 = Y2 = $50,000,
X = $16,800,
R = 10%,
The amount of inheritance I = $1,050.
After rearranging this equation, the value of consumption and saving is derived:
C = $42,550
S = $7450 (= $50,000-$42550).
Therefore, a rise in wealth leads to decrease the saving and increase the consumption.
e)
The change in saving and consumption when the expected tuition payment for next year rises from $16,800 to $18,900.
e)
Explanation of Solution
Y1 = Y2 = $50,000,
New expected tuition payment X = $18,900,
R = 10%,
After rearranging this equation, the value of consumption and saving is derived:
C = $41000
S = $9000 (= $50,000-$41000).
Therefore, a rise in expected tuition fee for next year leads to increase the saving and decrease the consumption.
f)
The change in saving and consumption when rate of interest rises from 10% to 24%.
f)
Explanation of Solution
The real interest rate rises from 10% to 24%.
Y1 = Y2= $50,000,
X = $16800,
New rate R = 24%,
After rearranging this equation, the value of consumption and saving is derived:
C = $42500
S = $7500 (= $50,000-$42500).
Therefore, a rise in wealth leads to decrease the saving and increase the consumption.
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Chapter 4 Solutions
Macroeconomics
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