Question

Crusoe begins with an endowment A. Point R is the

Q: Answer-Crusoe begins with an endowment A. Point R is the consumption combination he would choose at real in...

Crusoes wealth has decreased because of the change in the real interest rate. Because Crusoes endowment and preferences are such that he is a borrower, the increase in the interest rate hurts him. Note the MRS 1r at point R.

consumption combination he would choose at real interest rate r and point R´ is the consumption combination he would choose at real interest rate r´. Which of the following statements is true?

A Crusoe is a lender today

B Crusoe’s wealth has decreased because of the change in the real interest rate

C The marginal rate of intertemporal substitution at R is equal to r.

D The change in interest rate does not decrease Crusoe’s utility since he is free to keep his original endowment A if he so chooses

E None of these

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Crusoe begins with an endowment A. Point R is the

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