please answer all of them 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?

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

please answer all of them

2 Different Rates for Borrowing and Lending
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 rp (b for borrowing) with rp > 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 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.
• (iii) Consider the case in which he SAVES. How does consumption in period 1 change when the interest rate rb
increases 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 interest
rate rp increases a little bit? How does consumption in period 1 change when the interest rate rs increases a little
bit?
• (v) Finally, consider the case in which he does NOT BORROW OR SAVE. How does consumption in period 1
change when the interest rate rp increases a little bit? How does consumption in period 1 change when the interest
rate rs increases a little bit?

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