zeroinfy

A consumer is making saving plans for this year and the next. She knows her real income after taxes will be €20,000 in both years. Any part of her income saved this year will earn a real interest rate of 3% between this year and next year. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). There is no uncertainty about the future.

The consumer wants to save an amount this year that will allow her to

(1) make college tuition payments next year equal to €5000 in real terms; 
(2) enjoy exactly the same amount of consumption this year and next year, not counting tuition payments as part of next year’s consumption; and

(3) have neither assets nor debts at the end of next year.

a. How much should the consumer save this year? 
    How much should she consume?