How can john borrow money at the rate of interest

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Reference no: EM13224625

There are two periods, this year and next year. John receives his income and undertakes all his expenditures at the end of each year. Let Y1 denote his income at the end of this year and Y2 denote his income at the end of next year. And let E1 denote his expenditure at the end of this year and E2 denote his expenditure at the end of next year. At the end of this year he will receive $100,000 in income, and at the end of next year, he will receive $105,000 in income. At the end of this year, he can lend money at a rate of interest of 5%, which is to be paid back at the end of next year, or he can borrow money at the rate of interest of 10%, which he must pay back by the end of next year. He starts this year with nothing in the bank and ends next year with nothing in the bank. Draw his budget constraint in E1 - E2 space. (Hint: He has the option of spending all of this year's income when he receives it, and all of next year's income when he receives it).

Reference no: EM13224625

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