1. Consider a two-period Fisher model of consumption in chapter 17.
- (a) Derive inter-temporal budget constraint. Interpret the constraint carefully.
- (b) Jill earns nothing in the first period and 210 in the second period. He can borrow or lend at the interest rate r. You observe that Jill consumes $100 in the first period and $100 in the second period. What is the interest rate r?
- (c) Graphically illustrate the effect of Jill’s consumption in the first period when the interest rate increases? Make sure to label: the axes and curves.
- (d) Is Jill better off or worse off than before the interest rate increase? Explain.