8. (Appendix 4.A) A Romanian consumer has initial real wealth of 2000, current real income of €9000, and future real income of €11,000. The real interest rate is 5% per period.

a. Find the consumer’s PVLR.

b. Write the equation for the consumer’s budget constraint (using the given numerical values) and graph the budget line.

Suppose that the consumer’s goal is to smooth consumption completely. That is, he wants to have the same level of consumption in both the current and the future period.

c. How much will he save and consume in the current period?

d. How will his current saving and consumption be affected by an increase of 1000 in current income?

e. How will his current saving and consumption be affected by an increase of 1000 in future income?

f. How will his current saving and consumption be affected by an increase of 1000 in his initial wealth?