Suppose there are two individuals, Frank and Michelle, each with the income of $10,000 this year and next year. Frank consumes $10,833 in the first year and $9,000 in the second. Michelle, on the other hand, consumes $9,167 in the first year and $11,000 in the second.

Can you tell who is the saver or borrower in this scenario?

What is the interest rate if borrowing equals saving? What amount does the saving equal to? What amount does the borrowing equal to? Is the market for loanable funds in equilibrium?

In each of two diagrams, draw a budget line (BL) passing through the endowment point E for each individual and label this BL "AB". At the equilibrium in each diagram, label Frank's equilibrium consumption basket "F" in the Frank diagram and Michelle's one "M" in the Michelle diagram. Then draw the indifference curve IC_AB in each diagram, reflecting the point of tangency at each respective equilibrium point F or M.

Suppose now the interest rate has changed to 40 percent. Draw the new budget line and label it "CD" in each respective diagram. What will be impacts? -- Is Frank better off than before the interest rate changed? How about Michelle? What happens to the consumption of each person in each period?