Problem
A 2019 editorial, based on a Statistics Canada report on consumer debt, state the following:
Debt seems a vast, sucking field of muck in which we flail. Unrepayable lifetime debt now seems to be a business model. Students enter the professional world owing hundreds of thousands, and otherwise sane people carry heavv credit card balances, with the usurious vigor that comes with them. Statistics Canada says that Canadians carry a total debt load of 179 percent of their disposable income. That is nosebleed level.
1) What is the fundamental reason why people borrow money, and is this reason the same or different from the reason why other people save money? Does this borrowing and saving increase or decrease individual welfare?
2) Presumably the writer of this editorial would prefer it if Canadians saved money rather than borrowed it. Ignoring international capital flows (that is, assume the Canadian loanable funds market is just made up of Canadians), what does all of this heavy borrowing say about the amount of savings?
3) Mortgage rates and bank loan interest rates have been historically low since 2008, and this has led to large amounts of borrowing. In a graph, show what must have happened in the loanable funds market.
4) The average Canadian disposable income for 2019 is about $30,000. According to Statistics Canada this average household has $53,700 in debt (ie. 179% of income. Suppose that the interest is 5% and is expected to stay that way, also suppose that this debt must be paid back in equal yearly instalments over a period of ten years. Using the appropriate table in the chapter, what is the annual payment that must be made? Hint: think of the $53,700 as the "present value" in the table.)