(Answered) Question regarding the income and substitution effect

Economics

Question: Suppose Joe earns $1,000 in year 1 and $0 in year 2. Any amount he saves will earn interest at a rate of 10%. Draw Joe's budget line. (Hint: He can either consume all $1000 this year or consume nothing this year and have $1,100 next year.) Assuming convex indifference curves, show that an increase in the rate of interest can cause Joe's savings to either increase or decrease. Explain in terms of income and substitution effect. Explain your answers and provides examples.

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Macroeconomics, Economics

Category:- Macroeconomics
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