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Solutior What does the paradox of thrilt refer to Select one a
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Solutior What does the paradox of thrilt refer to Select one a. Decreases in government spending can cause decreases in net laxes b. Decreases in the marginal propensity to consume (MPC) can cause decreases sings c. Decreases in income can cause decreases in imports d. Decreases in autonomous consumption can cause decreases in future income
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Selim has no income in period 1 (consumption now) and an income of 1800£ in period 2 (consumption later). The current interest rate is 20% (r=0.2) on consumer loans. Based on this information, answer the following questions a. What is the maximum amount that Selim can borrow to spend in period 1? Explain your answer. b. Can he spend 600 in period 2 and borrow 1000 in period 1?
Expert Solution
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Answer is option D.
Because as per paradox of thrift, rise in autonomous spending during recession leads to decdease in aggregate demand and thus decrease in economic output which further leads to decrease in savings.
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Income in period 1 = 0
Income in period 2 = 1,800
Interest rate = 20%
a) Maximum amount that Selim can borrow in period 1: Amount borrowed = [Income in Period 2 / (1 + Rate of Interest)]
Amount borrowed in period 1 = [1,800 / (1 + 0.2)] = 1,500
b) Future value of 1,000 spent in period 1 in terms of period 2 = 1,000 * (1 + 0.2) = 1,200
Money spent in period 2 = 600
Total spending in terms of period 2 = 1,200 + 600 = 1,800 where income in period 2 is 1,800. Thus, this spending pattern is absolutely possible.
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