Consider a two-period Fisher model of consumption in chapter 17. Derive inter-temporal budget constraint. Interpret the constraint carefully.

1. Consider a two-period Fisher model of consumption in chapter 17.

  1.  Derive inter-temporal budget constraint. Interpret the constraint carefully.
  2.  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?
  3.  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.
  4. Is Jill better off or worse off than before the interest rate increase? Explain.

Leave a Reply