intertemporal choice
Question Description
I’m working on a micro economics exercise and need an explanation and answer to help me learn.
PROBLEM 2 )ntertemporal choice
You have 100 000 USD now. Yearly inflation is 10%, interest rate both for borrowing (loans) and saving deposits is 5% a year.
You have two opportunities:
- Deposit your money for three years (deposit rate 5% a year)
- Or borrow 100 000 more (interest rate for borrowing is 8%) and buy an apartment for 200 000. The price of an apartment will be appreciated every year along with inflation.
Question 1: what will be your nominal profit in three years for both scenarios? Which one is better?
Question 2: what is your real income or loss for both scenarios? (Adjusted to inflation)
Question 3: Draw a graph of intertemporal budget constraint between present value and future value (real income), for both scenarios (two lines)
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