Assume that Carolyn experiences two periods in her life, one in which she works and earns income, and one in which she is retired and earns no income. Carolyn can earn $300,000 during her working period and nothing in her retirement period. Carolyn faces a decision on how much she consumes in the present and how much she saves now and consumes in the future. She can earn 10 percent interest on her savings.

Draw Carolyn's budget constraint. Put the consumption in the future in the vertical axis and consumption in the present in the horizontal axis

On the same graph, draw the indifference curve and show Carolyn’s optimal level of consumption in the present equal to $150,000.

Explain how Carolyn will be affected by a decrease in the interest rate on savings to 8 percent. Discuss the role of income and substitution effects in determining whether Carolyn will increase or decrease her savings in the work period. No need to use diagrams to explain and illustrate your answer