What the equilibrium could be if the interest rate increased

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Consider the inter-temporal model of consumption of a household who has a first period income of 300 and a second year income of 330. The interest rate is 10%. The household saves 100 in period one.

a) Write the budget constraint of period one and the budget constraint of period two and the inter-temporal budget constraint

b) Graph the household budget line and show its equilibrium point.

c) Discuss and show graphically the income and substitution effect and what the equilibrium could be if the interest rate decreases.

Consider the inter-temporal model of consumption of a household who has a first period income of 200 and receives a gift of 100 in period one. In period two his income is of 220 and he leaves a bequest of 55. The interest rate is 10%. The household borrows 50 in period one.

a) Write the budget constraint of period one and the budget constraint of period two and the inter-temporal budget constraint

b) Graph the household budget line and show its equilibrium point.

c) Discuss and show graphically the income and substitution effects and what the equilibrium could be if the interest rate increased.

Reference no: EM13187245

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