Hi, the correct answer to the question is provided in red, please dont reproduce the answer as i am struggling to understand the answer, but explanations in step by step, please dont worry about the unhelpful , i will vote for helpful if its good enough . Thanks

Q8. The rst order condition for consumption says that if the real interest rate is higher than the subjective rate of discount the consumer will plan consumption to increase over time. Explain why this is so. If the real interest rate is higher than the subjective rate of discount. the consumer will postpone 1+?\" consumption and thus consume less today that he/she plans to consume next year. [fa > 1. this means that returns on saving are high relatively to the degree of impatience. Therefore a consumer will like to wait a little bit in order to consume more in the future. and consumption will increase over time. Q9. Anna lives for two periods, 1 and 2. Her consumption in the two periods is determined by the tangency point between the indifference curve (I) and the budget line in Figure 4.10 {reproduced below]. Fig. 4.10 The reai interest rate on consumption with negative saving [a] Is Anna saving or borrowing in period 1? Since consumption exceeds income in period 1. Anna is borrowing in period 1. [b] Suppose the real interest rate falls. Draw the new budget line so that it is tangent to the indifference curve 1. How is Anna's consumption in period 1 affected by the decrease in the interest rate? A lower interest rate implies a flatter budget line. It still goes through point [Y1. Y2] .because you can always choose to consume your income. Consumption in period 1 increases to C'. .0 naaiiinn-n Y1 C. C" [c] What happens to savIngs/borrowlngs In perIod 1? Anna borrows more in period 1. (d) How IsAnna's consumption In perIod 2 affected by the decrease In the Interest rate? In the case drawn here, consumption in period 2 is unchanged. Although Anna borrows more, but the lower interest rate compensates so consumption next period is unchanged. Of course, this is not necessarily the case. [e] ExplaIn the results In terms of Income and substitutIon effects. Since Anna is initially borrowing in period 1, a lower interest rate makes her better off [i.e. the income effect is positive]. Since the substitution effect ofa change like this is always positive, this means that the substitution and income effects go in the same direction, so consumption in period 1 increases. For period 2, substitution and income effects go in opposite directions. 0n the one ha nd, lower interest makes it less attractive to save and consume next period [i.e. the substitution effect is negative in period 1]. 0n the other hand, a lower interest rate makes this consumer better off [i.e. the income effect is still positive)