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Question: Suppose that you are currently a college senior. You are currently working a part-time job that p...

Show transcribed image text Suppose that you are currently a college senior. You are currently working a part-time job that pays $2,000 per year (call it Yl), but you expect to earn $20,000 next year (call it Y2), after you graduate. Assume that there is no inflation and that the interest rate is 10% per year. a) You want to smooth consumption such that consumption this year equals consumption next year (that is C1 = C2.) Solve for consumption this year and next year. What is your saving (S)? b) Present a graph showing Yl, Y2, Cl, C2 and the intercepts. b) Suppose that your current income (Yl) doubles to $4,000 per year. What happens to your current consumption? What happens to your saving? [numbers please] c) Set Yl back to $2,000. Suppose that expected income (Y2) doubles to $40,000 per year. What happens to your current consumption? What happens to your saving? [numbers please] d) Go back to the initial incomes. Suppose that the interest rate suddenly increased to 15%. Solve for consumption this year and next year.

Suppose that you are currently a college senior. You are currently working a part-time job that pays $2,000 per year (call it Yl), but you expect to earn $20,000 next year (call it Y2), after you graduate. Assume that there is no inflation and that the interest rate is 10% per year. a) You want to smooth consumption such that consumption this year equals consumption next year (that is C1 = C2.) Solve for consumption this year and next year. What is your saving (S)? b) Present a graph showing Yl, Y2, Cl, C2 and the intercepts. b) Suppose that your current income (Yl) doubles to $4,000 per year. What happens to your current consumption? What happens to your saving? [numbers please] c) Set Yl back to $2,000. Suppose that expected income (Y2) doubles to $40,000 per year. What happens to your current consumption? What happens to your saving? [numbers please] d) Go back to the initial incomes. Suppose that the interest rate suddenly increased to 15%. Solve for consumption this year and next year.