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Budgeting and Savings Analysis Guide

(1) The document describes a scenario where an individual has $2000 in monthly income to cover fixed expenses of $1200 and variable expenses of food, clothing, and entertainment (FCE) that must be at least $200. (2) Any remaining money can be saved in a bank account earning varying interest rates each month between 0.5-25%. (3) The individual must decide how much to allocate to FCE and savings each month based on the interest rates.

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Sumit Chakraborty
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190 views1 page

Budgeting and Savings Analysis Guide

(1) The document describes a scenario where an individual has $2000 in monthly income to cover fixed expenses of $1200 and variable expenses of food, clothing, and entertainment (FCE) that must be at least $200. (2) Any remaining money can be saved in a bank account earning varying interest rates each month between 0.5-25%. (3) The individual must decide how much to allocate to FCE and savings each month based on the interest rates.

Uploaded by

Sumit Chakraborty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Imagine you have $2000 each month to cover your living expenses.

Items like rent, insurance and utilities are fixed every


month and total $1200. Items like food, clothing, and entertainment can fluctuate depending upon your tastes and desires,
but the bare minimum amount of food + clothing + entertainment (FCE) will cost you $200 each month. If you have paid
all of your bills and there are additional dollars in your budget, you can save this money in the bank and earn some
interest income. The interest rate fluctuates from month to month. (Use marginal analysis to complete this task. There is
no specifically correct amount to spend, but your spending should indicate you understand the relationship between
interest rate and savings)

The table below allows you to make some spending and saving choices over the next six months. You will see your
income and fixed expenses are already completed for you. You must consider how much money you wish to spend on
FCE (minimum of $200) and how much you wish to save.

Interest Rate
Fixed Variable
Month on Savings Income= Savings
expenses + expenses (FCE) +
at the bank
January 10% $2000= $1200
February 6% $2000= $1200
March 2% $2000= $1200
April 20% $2000= $1200
May 25% $2000= $1200
June 0.5% $2000= $1200

Now that you have completed the table, create a graph that puts the interest rate on the vertical axis and the amount of
money you would spend on FCE on the horizontal axis. Plot the six points and describe any trends you might see. What
do you suppose explains why the graph turned out the way it did?

Watch the following videos on graphing Money Market:

Money Market 1

Money Market 2

Money Market, Investment and Aggregate Model

Answer the following questions:

Draw the Money Market Graph and Aggregate Model, for each of the following situations. Start in long-run equilibrium.
LABEL EVERYTHING!

1. Lowering the reserve requirement.


2. Selling bonds on the open market.

For each of the following situations, draw the Money Market Graph and Aggregate Model. Make sure to start your
aggregate model in long-run equilibrium to show what affect the change has on the market. LABEL EVERYTHING!

1. Confidence in banks has decreased because of a series of hacks into the banking system.
2. Aggregate price level has decreased by 15%.

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