7. (Appendix 4.A) Consumers typically pay a higher real interest rate to borrow than they receive when they lend (by making bank deposits, for example).

Draw a consumer’s budget line under the assump tion that the real interest rate earned on funds lent, rl is lower than the real interest rate paid to borrow, r .

b l

Show how the budget line is affected by an increase in r , an increase in r , b or an increase in the consum er’s initial wealth.

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