Assume that the annual interest rate (i.e., discount rate) is expected to be 1% constantly over 20 years. Based on this scenario,

1. What is their expected annual level of consumption according to consumption smoothing?

Hint: Treat the house upgrade fund as a bequest.

The annual level of consumption is 108,369.84

2. Let us say we want to adjust inflation rates for their consumption. Specifically, their annual consumptions also have a growth rate of 1%. In this case, consumption smoothing is satisfied if:

where Ct is the consumption level in year t. What is their expected annual consumption in year 1 according to consumption smoothing?