=+8.10* Policy Application: Subsidizing Savings versus Taxing Borrowing: In end-of-chapter exercise 6.10, we analyzed cases where the interest rates for borrowing and saving are different. Part of the reason they might be different is because of government policy.

A. Suppose banks are currently willing to lend and borrow at the same interest rate. Consider an individual who has income e1 now and e2 in a future period, with the interest rate over that period equal to r. After considering the trade-offs, the individual chooses to borrow on his or her future income rather than save. Suppose in this exercise that the individual’s tastes are homothetic.