An economy has 100 households. The ten rich households each have incomes of $50,000 in period 1 and $75,000 in period 2. The ninety poor households each have incomes of $20,000 in period 1 and $25,000 in period 2. Assume that the price of the good is $1 in both periods. Also assume that the households borrow from each other. Suppose that each household decides that its consumption in period 1 will equal 50 percent of the present value of its income from both periods. The equilibrium real interest rate is about
A. 20 percent.
B. 30 percent.
C. 40 percent.
D. 50 percent.
Answer: B
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