Question: Whether you should spend or save will depend not just on your time preference, but on the interest you can get when putting your money

Whether you should spend or save will depend not just on your time preference, but on the interest you can get when putting your money in a savings account. Suppose you have the option of spending $w now or saving it until next year. If you save it, the bank will pay you interest rate i.

(a) Suppose that your utility function is u(x) = x. What does your discount factor S need to be for you to be indifferent between spending it now and saving it?

What about your discount rater (see text box on the previous page)?

(b) Suppose that your utility function is 11(x) = -../x. What does your discount factor 8 need to be for you to be indifferent between spending it now and saving it?

What about your discount rate r?

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