1. Jane is planning her consumption now-consumption later decision. The interest rate for borrowing or lending (saving) is 15%. Just as she completes her planning, she realizes that she has overlooked changes in the price level.

a. Jane expects prices to fall 5% by the start of the second period. Show how that will change her budget from its original version. (Think carefully about what the axes measure).

b. When Jane reacts to the anticipated deflation, how will she change her plans for consumption and saving?

*Personal note*:

I believe that since the interest rate isn't expected to change but prices are expected to fall in the future, that means that she will save more and consume less now, and will consume more later (though I could be wrong). However, I have no idea how to go about showing that on an intertemporal choice model. I'd appreciate any help!