I) Draw the budget line and the relevant indifference curve for a consumer who is initially a borrower. Indicate the no-borrowing no-lending point (label it as N) and the optimal consumption point (label it as A).
II) Show the effect of an increase in the real interest rate on the budget line and the consumer's optimal consumption. Using an intermediate budget line, show the income effect and the substitution effect on the current consumption and the future consumption. Specify whether these effects work in the same direction or the opposite directions?