23.8 Suppose an individual has W dollars to allocate between consumption this period (Co) and consumption next period (Q) and that the interest rate is given by r.

a. Graph the individual's initial equilibrium and indicate the total value of current-period savings (W— Co).

b. Suppose that after the individual makes his or her savings decision (by purchasing oneperiod bonds), the interest rate falls tor'. How will this alter the individual's budget con straint? Show the new utility-maximizing position. Discuss how the individual's improved position can be interpreted as resulting from a "capital gain" on his or her initial bond purchases.