Dagwood's neighbor, Homer Simpson, does not abide by the life cycle theory of consumption.Homer has a "let's live life like it's our last day" mentality and thus, he prefers to consume more today, relative to the future. In particular, Homer prefers to consume exactly twice as much today, relative to consumption next period.Homer's current income equals $150K and his future expected income = $150K.He has no wealth (neither current nor expected).

Homer faces a real interest rate of 0.05.Please answer the following questions.

1.Calculate Homer's optimal consumption bundle showing all work.

2.Draw a completely labeled graph (the two-period consumption model) depicting this initial optimal consumption bundle and label it as point C*_A. Be sure to label the no lending / no borrowing point = NL/NB.

3.Homer goes to work and the rumor being spread around the work place is that future demand is increasing as Homer works in the 'green energy' field. As a result, Homer revises his estimate of future income up to $200K (his current income is not effected). Recalculate the optimal bundle for Homer and add this point to your graph and label as point C*_B.

4.Is Homer worse off or better off?

5.The Fed decides to conduct massive amounts of open market purchases and get the real rate of interest all the way down to-5%Recalculate the optimal bundle for Homer and add this point to your graph and label as point C*_C. (Note, point C*_C incorporates the shock to Homer's future income in part c).

6.Is Homer better or worse off due to the fall in the real rate of interest?