Consider an economy with a capital market. Suppose the economy starts at their endowment yo,y1 where MRS>MRT. (a) Illustrate in a diagram the two steps of the Fisher Separation Theorem, where the economy eventually settles in an equilibrium with positive investment and borrowing. For each step describe in words how the Fisher Separation theorem is achieved.

(b) In your diagram of part (a), compare the equilibrium of utility and present value of wealth with that of an economy with no capital markets.