Leonardo has an income of $10,000 this year, and he expects an income of $5,000 next year. He can borrow and lend money at an interest rate of 10%.

Consumption goods cost $1 per unit this year and there is no ination.

a. How would his utility change if the interest rate goes up to 15%? Is he better off or worse off? Explain.

b. What about if there is a 10% inflation? Show how his budget constraint and his utility changes with a graph. A simple illustration is fine.

c.Graph his budget constraint and find his optimum bundle if the interest rate to borrow is 15% but return to his savings is 10% with no inflation.

d. Discuss the importance of financial markets and how they can improve our utility.

Utility Function: U(c1, c2)=4ln(c1)+2ln(c2)