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1: A Two-Period Model with a Perfect Credit Market Consider the two-period model of consumption-savings decisions with a perfect credit market. An intertemporal consumption-savings decision
1: A Two-Period Model with a Perfect Credit Market Consider the two-period model of consumption-savings decisions with a perfect credit market. An intertemporal consumption-savings decision implies an economic trade-off between current and future consumption, where the (a) Starting from the consumer's current-period and future-period budget constraints, derive the consumer's life time budget constraint. (b) Re-write the lifetime budget constraint in slope-intercept form, and draw a graph of the consumer's interest rate is used to identify the present value of future consumption goods. lifetime budget constraint. Add an indifference curve to your graph, showing a utility-maximizing bundle of current and future consumption for a borrower. (c) Suppose that you win the lottery, which offers a one-time large cash settlement. How would this change your (i) current consumption, (ii) future consumption and (iii) savings, as predicted by the model? Draw a graph and make reference to it when answering this
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