1. Consider a two-period Fisher model of consumption in chapter 17.
- Derive inter-temporal budget constraint. Interpret the constraint carefully.
- 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?
- 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.
- Is Jill better off or worse off than before the interest rate increase? Explain.