How would each of the following affect Cheryl Shirker's current consumption and saving? Cheryl is a forward-looking consumer with no borrowing constraints.(a)Cheryl's firm announces a reorganization plan, increasing Cheryl's future income dramatically.(b)Cheryl's father, who had planned to leave her a large bequest, must spend all his wealth on medical bills after a prolonged illness.(c)The real interest rate rises from its original level. Cheryl originally planned to have no assets for the future; that is, she planned to spend all her original assets and all her income when she was young, and planned to consume an amount equal to her future income when she was old.
What will be an ideal response?
| (a) | The rise in future income raises her current consumption and reduces her saving. |
| (b) | The reduction in her wealth reduces her current consumption and raises her saving. |
| (c) | The rise in the real interest rate causes Cheryl to reduce current consumption and increase |
Economics
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