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Now assume that the interest rate drops to r=5% Assuming Y₀=1000, Y₁=600 and C₀=800, calculate C₁.
Use the intertemporal budget constraint formula C₀ + C₁/(1+r) = Y₀ + Y₁/(1+r) This budget constraint equation represents an individual planning her consumption over two periods (before retirement 0, after retirement 1). This an intertemporal budget constraint in which the present value of consumer expenditures must equal the present value of income in the two periods. Where Y represents income, C represents consumption, and r represents rate of return.
A. 822
B. 868
C. 810
D. 876

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