(i) Graph the budget constraint for the individual. (ii) Add to your graph the consumer’s indifference curves. Show graphically three possible outcomes: one in which the consumer saves, one in which he borrows, and one in which he neither borrows nor saves.
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Consider now the intermediate case in which the interest rate charged by the bank for borrowing is larger than the
interest rate paid by the bank to the consumer for the money they deposit in the bank. In other words, the consumer can
SAVE at the rate rs (s for saving) and can BORROW at rate rb (b for borrowing) with rb > rs. The individual receives y1
and y2 in periods 1 and 2 respectively.
• (i) Graph the budget constraint for the individual.
(ii) Add to your graph the consumer’s indifference
the consumer saves, one in which he borrows, and one in which he neither borrows nor saves.
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