An individual has a certain amount of money to be allocated for consumption between this year and next year, with no income expected next year. Initially, their only option for saving is to store the cash, which earns no interest. They are then presented with a new, risk-free opportunity to lend any saved money at a positive interest rate. Why is this individual guaranteed to be at least as well off, and likely better off, with the new lending option?

Analyzing the Impact of a New Lending Opportunity

An individual, who initially could only save by storing cash at a 0% return, is now given an additional option to lend money at a 10% interest rate. It is possible for this individual to choose a new combination of current and future consumption that results in a lower level of overall satisfaction than their best choice when only storing was possible.

An individual has an endowment of $200 for current consumption and no future income. Initially, their only option for carrying wealth into the future is to store it as cash, earning 0% interest. Under this condition, their preferred choice is to consume $150 now and have $50 in the future. Now, they are offered a new, risk-free opportunity to lend any savings at a 10% interest rate. How does this new option affect their potential well-being?

Evaluating a Consumption Choice Claim

The Guaranteed Benefit of a New Lending Opportunity

An individual has an endowment of $100 to consume now and no income in the future. They can either store unspent money (earning 0% interest) or lend it at a positive interest rate. Match each term related to their choice with its correct description.

An individual receives all their income now and none in the future. Initially, they can only save by storing cash. They are then given a new option to lend money at a positive interest rate. Arrange the following steps in the logical order that describes how their economic well-being is improved.

An individual has an endowment of $100 to spend now and no income in the future. Their only initial option is to store any unspent money, which earns 0% interest. If they are then given a new opportunity to lend their money at a 20% interest rate, the maximum possible amount they could have for future consumption increases to $______. (Enter a numerical value only)

Evaluating Savings Options