What is the market rate of interest

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Ben earns $4,000 this year and zero income next year. Ben also has an investment opportunity in which he can invest $2,000 and receive $3,000 next year. Suppose Ben consumes $1,000 this year, invests in the project and consumes $4,150 next year.

1. What is the market rate of interest?

2. Suppose the interest rate increases. What will happen to Ben's consumption next year? Is Ben better off or worse off than before the interest rate rise? Explain with a carefully labeled inter-temporal consumption diagram.

Reference no: EM133377890

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