Here is a brief example that explain the impact of interest rates. We’ll assume two periods for simplicity sake. Period 1 (Year 1) will be the CURRENT period, and Period 2 (Year 2) will be the FUTURE period.

Other notes for this example: A consumer who earns $30,000/year; an interest rate of 5% for savings and borrowings.

Case 1: (All income consumed currently)

Case 2: (All income consumed in the future)

Cost to Consume Period 2 Income in Period 1

$1428.57 = (Consumer borrows $28,571.43 @ 5%)

Income Earned By Saving Period 1 Income to Spend In Period 2

$60,000- ($1,428) yr1= $58,571.43

$30,000*.05 = $1500

30,000 Year 1 saved

30,000 Year 2 saved

1,500 interest

Total Income Available

$58,571.43

(Spent in Period 1)

Y0 + (Y1 / 1+ r)

= $61,500.00

(Spent in Period 2)

Y1 + Y0 (1 + r)

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