7. (Appendix 4.A ) Consumers typically pay a higher real interest

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rate to borrow than they receive when they lend (by making bank deposits, for example). Draw a consumer’s budget line under the assumption that the real interest rate earned on funds lent, is lower than the real interest rate paid to borrow, rb.

rl Show how the budget line is affected by an increase in rl, increase in the consumer’s initial wealth.

an increase in rb, Show that changes in and may leave current and future rl rb or an consumption unchanged. (Hint: Draw the consumer’s indifference curves so that the consumer initially chooses the no-borrowing, no-lending point.)