3.Below is the foundation of the two-period consumption model discussed in class. You are given the no lending - no borrowing point (NL/NB) for this economic agent.

a)[2.5]Clearly label both the vertical and the horizontal axis in this model.

b)[2.5]Assume the Fed sets the real interest rate at r^FED. Draw a budget constraint assuming that this consumer can borrow and save at r^FED. Label this BC^FED.

Let r^B represent the rate at which a consumer can borrow, which is greater than r^FED and let r^S represent the rate at which a consumer can save, which is less than r^FED.

a)[5]Draw me a budget constraint assuming that r^B is the rate at which this economic agent can borrow and r^S is the rate at which this economic agent can save. Label this BC^REAL.

a)In the 'real-world' situation, are borrowers better or worse off? Explain.

a)[2.5]In the 'real-world' situation, are savers better or worse off? Explain.