Question

Question Completion Status: QUESTION 19 Aji Fatou and Mustapha both obey the two-period model of consumption. Aji Fatou earns $100 in the first period and $100 in the second period. Mustapha cams nothing in the first period and $210 in the second period. Both of them can borrow or lend at the interest rater. You observe both Aji Fatou & Mustapha consuming $100 in the first period and $100 in the second period. What is the interest rater? a 10% b. 12.5% c.8% 0.5% QUESTION 20 Aji Fatou and Mustapha both obey the two-period model of consumption. Aji Fatou earns $100 in the first period and $100 in the second period. Mustapha eams nothing in the first period and $210 in the second period. Both of them can borrow or lend at the interest rater. You observe both Aji Fatou & Mustapha consuming $100 in the first period and $100 in the second period. How much is Mustapha's loan from the first period and how much did he have to repay in period 2? a. Mustapha's loan was $100 in the first period and he has to repay $100 in period 2. b. Mustapha's loan was $100 in the first period and he has to repay $110 in period 2. c. Mustapha's loan was $210 in the first period and he has to repay $210 in period 2. d. Mustapha's loan was so in the first period and he has nothing to repay in period 2.

Answer 1

19) Aji Fatou earns $100 in period 1 and $110 in period 2

Mustapha earns $0 in period 1 and $210 in period 2

Both of them consumes $100 in period 1

Aju Fatou spend his income of period 1 while Mustapha borrows $100 in period 1.

Assume rate of interest is t

Mustapha will have to pay 100 (1 + r) in period 2 out of his income from $210

100 (1 + t) + 100 = 210 ....Mustapha Budget Constraint (First year conusmption + Second year consumption = Total Income)

t = 0.1 which is 10%

Option A is correct.

20) As rate of interest is 10%, it makes Mustapha payment in second year is 100 + 100 * 0.1 = 110

Thus Mustapha loan was $100 in period 1 and he has to pay $110 in period 2

Option B is correct.