please answer (iv)(v) 2 Different Rates for Borrowing and LendingIn Class we considered the case in which the consumer can borrow and lend freely and the interest rate r. We alsoconsidered the case in which the individual can save at rate r but cannot borrow at all.Consider now the intermediate case in which the interest rate charged by the bank for borrowing is larger than theinterest rate paid by the bank to the consumer for the money they deposit in the bank. In other words, the consumer canSAVE at the rate rs (s for saving) and can BORROW at rate rp (b for borrowing) with rp > rs. The individual receives y1and y2 in periods 1 and 2 respectively.(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 whichthe consumer saves, one in which he borrows, and one in which he neither borrows nor saves.• (iii) Consider the case in which he SAVES. How does consumption in period 1 change when the interest rate rbincreases a little bit? How does consumption in period 1 change when the interest rate rs increases a little bit?• (iv) Consider now the case in which he BORROWS. How does consumption in period 1 change when the interestrate rp increases a little bit? How does consumption in period 1 change when the interest rate rs increases a littlebit?• (v) Finally, consider the case in which he does NOT BORROW OR SAVE. How does consumption in period 1change when the interest rate rp increases a little bit? How does consumption in period 1 change when the interestrate rs increases a little bit?

A Budget Constraint is defined as the all the combinations of goods and services a consumer can…

In Class we considered the case in which the consumer can borrow and lend freely and the interest rate r. We also considered the case in which the individual can save at rate r but cannot borrow at all. 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 ro (b for borrowing) with rb > rs. The individual receives y1 and y2 in periods 1 and 2 respectively.

In Class we considered the case in which the consumer can borrow and lend freely and the interest rate r. We also considered the case in which the individual can save at rate r but cannot borrow at all. 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 ro (b for borrowing) with rb > rs. The individual receives y1 and y2 in periods 1 and 2 respectively.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter13: Monetary Policy: Conventional And Unconventional

Section: Chapter Questions

Problem 4TY

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