Part C, D, E

1. Consider a household in the two-period consumption-savings model. The household has well-behaved preferences over period-l and -2 consumption given by n{c1,c3], is are con- strained by their period budget constraints, A: = {1+ ]At_1 + Y, Ptct for t = 1, 2. {a} Use the Fisher Equation to transform the period budget constraints into real terms. (HINT: You may convert one period budget constraint directly, say for t = 1, and generalize to the other.) {b} Use your answers from part [a] to derive the Lifetime Budget Constraint {LED} in real terms. Assume the initial and terminal conditions oz = on = I). {c} Use indifference curve analysis to graphically locate the optimal choice {c}, c3]. Label slopes and intercepts on your graph. {d} locate on the budget constraint for your graph in part {c} a potential point for the combination real income {phyla} that implies the household is a saver in period 1. {e} For each of the following assumptions, use indi'erenoe curve analysis to illustrate how a. decrease in the real interest rate affects optimal choicm of consumption {ci,c) and period-1 savings, 3?\