Economics

Consider a consumer facing a two-period model of an intertemporal choice problem.

(a) Using diagrams to illustrate your answer, formulate and discuss the consumer’s

intertemporal optimization problem.

(b) Using diagrams to illustrate your answer, explain the effects of an increase in

the interest rate on the level of consumption in each period and on whether the

consumer has become better off when the consumer is:

(i) a borrower in the first period

(ii) a saver in the first period.

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