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I already solved parts a and b, but in part c, how would the graph change in response to the given information? 1. Suppose that

I already solved parts a and b, but in part c, how would the graph change in response to the given information?

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1. Suppose that the representative consumer has a utility function defined over consumption over two dates of the form U(C1, C2) = C12c22. The general form of the slope of the indifference curve for the representative consumer is - Cz/C,. Moreover, remember that c, = y1 - s and C2 = 12 + s(1 +r). a. Assume that the representative consumer has an endowment of consumption goods in the two periods of y, = 20 and y2 = 10. Assuming an interest rate r = 1, compute the equilibrium allocation and the implied savings. b. Suppose that, because of an attack of pessimism, the representative consumer assumes that future income will drop so that y2 = 0. What happens to the savings s in the first period? c. In the previous part, the interest rate remained at 1. Now, consider the savings function, that is, the relationship between the real rate of interest and the amount saved. The equilibrium interest rate is then determined as a market price in the Saving-Investment diagram. Given the typical shape of the investment curve, what would happen in response to the rate of interest in response to an attack of pessimism? Would the change in price ( the interest rate) amplify or reduce the magnitude of the shock to the quantity of savings? Explain with the help of a graph

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