1. The employer offers his/her employee the option of shifting x units of income from this...

 

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1. The employer offers his/her employee the option of shifting x units of income from this year to next year. That is, the option is to reduce the employee's income this year by x units and increase income next year by x units. a. Should the employee take this option? Explain using the standard two-period budget constraint and a diagram (you can assume zero taxes). b. Determine how this shift in income will affect the employee's consumption this year and next year and saving this year. Explain your results with the help of a diagram. c. Let's say the employee accepts the offer without evaluating it, because he hasn't taken Macroeconomics and is therefore unfamiliar with all of this. If there's an increase in interest rate right after he accepts the offer, how is he helped (or harmed) by this increase in interest rate? 1. The employer offers his/her employee the option of shifting x units of income from this year to next year. That is, the option is to reduce the employee's income this year by x units and increase income next year by x units. a. Should the employee take this option? Explain using the standard two-period budget constraint and a diagram (you can assume zero taxes). b. Determine how this shift in income will affect the employee's consumption this year and next year and saving this year. Explain your results with the help of a diagram. c. Let's say the employee accepts the offer without evaluating it, because he hasn't taken Macroeconomics and is therefore unfamiliar with all of this. If there's an increase in interest rate right after he accepts the offer, how is he helped (or harmed) by this increase in interest rate?

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Answer a i Whether the employee should take the option of shifting income from this year to next year depends on their preferences and time preferences for consumption If the employee prefers more consumption in the current year and is not averse to reducing consumption in the next year then they should not take the option ii On the other hand if the employee has a higher preference ... View the full answer