Becky has income of $1000 today and $500 tomorrow. Becky can lend and borrow at an interest rate of 10%. There is 5% ináation. Her preferences for intertemporal consumption are represented by the following utility function u(c1; c2) = minfc1; 2c2g
(a) What is her optimal consumption bundle?
(b) If interest rates increase to 20%, write down her new intertemporal budget constraint and graphically demonstrate the change to her intertemporal budget constraint and label any changes to the intercepts.
(c) How does this change e§ect her welfare? Explain.