21.12

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Musashi is a post doctoral fellow who tesches astrophysics at a university where he earns an annual salary of s160,000. He intends to take the next year off to focus on writing a new undergraduate physics textbook, so he will not earn any income next year. He is currently deciding how much of this year's salary he should save for next year. Assume that there are no tox implications associated with the decision, and ignore what happens after next year. Therefore, next year Musashi will consume whatever he saves this year plus interest, and he is not concerned with the future beyond next year. The following graph shows Musashi's preferences for consumption this year and next yeac, Suppose initially Musashl cannot earn interest on the money he saves. his optimum consumption bundie. Note; Dashed drop lines will automatically extend to both axes. Now suppose Musashi can earn 50% real interest on any money he saves. Use the blue line (circle symbol) to plot his new budget constraint (BC2 ) on the previous graph. Then use the grey point (star symbol) to plot his optimum consumption bundle at this interest rate. (Hint: To plot BC2, think about how much money Musashi would have next year if he saved his entire income this year.) Using the previous graph, complete the following table by indicating how much Musashi should save of his eurrent income when he cannot earn any interest on his savings and when he can earn 50% interest on his savings. All consumers, including Musashi, save less money when interest rates are high, because they don't need to save as much money to hav the same future income. In this case, Musashi saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high. In this case, Musoshi saves less money when interest rates are high. However, consumers with different preterences might save more money when interest rates are high