Amy has endowments of income of m1 = 50 in period 1 and m2 = 240 in period 2. She can borrow and lend at an interest rate of r = 0.2 (i.e. 20%). Her utility function over consumption in the two periods is given by U(c1, c2) = c1 c2

a) What is the present value of Amy's endowments?

b) What is the future value of Amy's endowments?

c) At her utility maximum she will consume c1 =______ and c2 = _______.

d) What are her net demand in period 1 and period 2?

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Now suppose the interest rate falls to r = 0.1, while m1 and m2 remain unchanged.

e) After this change, the future value of Belinda's endowments will now be _____, while the future value of her original consumption bundle will now be_______.

f) As a result of the change, Belinda's purchasing power has: ( Pick one )

1 - None of the other answers is correct.

2 - Decreased, because she can no longer afford her original consumption bundle.

3 - Decreased, because the market value of her endowment has fallen.

4 - Increased, because she can now more than afford her original consumption bundle.

5 - Increased, because the market value of her endowment has risen.