Sara earns $200 in the first period and $100 in the second period. She lives in the twoperiod Fisher model of consumption. Therefore, she can borrow or lend at the interest rate

r. Considering the two-period Fisher's model,

i. Write down her intertemporal budget constraint.

ii. Assume that She is consuming $150 in the first period and $160 in the second period.

What is the interest rate?

iii. Now assume that r=20%, (and Y1 = $200, Y2 = $100). Draw the intertemporal budget

constraint (IBC). Determine the maximum possible C1 and C2. You can also add an

indifference curve (IC) that is tangent to the point C1 = $150 and C2 = $160 of this

IBC. Call this as Figure 2.

iv. What will happen to Sara's consumption if the interest rate declines to r=10%. Support

your interpretation by updating Figure 2 and call the new figure as Figure 2.1.

v. What will happen to Sara's consumption if the interest rate increases to r=30%. Support your interpretation by updating Figure 2 and call the new figure as Figure 2.2.

vi. What is a borrowing constraint? Do you think that Sara is facing a borrowing constraint? Why?