Consider an individual who lives for two periods, earns a nominal income of $1000 in each period, and has zero initial and terminal assets. The nominal interest rate, i, on dollar loans is 15%, and the expected rate of inflation, pi^e, between the two periods is 10%. Assume that the price level in the first period is 1. a) What is the real value of period 1 income? b) What is the maximum amount of dollars that could be borrowed in period 1? Find the real value of this amount, and add it to the real value of period 1 income to see the maximum amount of (real) consumption possible in period 1. c) What is the price level in period 2? What is the real value of period 2 income? d) What is the maximum amount of dollars that can be obtained in period 2 by saving in period 1? Find the real value (in period 2) of this amount and add it to the real value of period 2 income to see the maximum amount of (real) consumption possible in period 2.

e) Plot a graph to show the consumption possibilities in the two periods. f) What is the slope of the budget line that you drew in part e)? Show that it is equal to -(1 + i)/(1 + pi^e)