Suppose we change the endowments of coconuts. Half the young people, known as borrowers, are endowed with no coconuts when young andcoconuts when old. The other half, known as lenders, are endowed withcoconuts when young and no coconuts when old.

Suppose both agents only have access to borrowing and lending

a) Write down their budget constraints and deduce their lifetime budget constraint

b) Plot their lifetime budget constraints

Suppose the substitution effect dominates the income effect

c) Explain how the demand and supply of loans is determined and plot the demand and the supply curves and denote the market clearing interest rate asr*1

d) Suppose the borrowers' endowment,, declines. Explain how the demand for loans curve changes (assume consumption when young and consumption when old are normal goods, i.e., demand falls when income falls). Plot the new demand curve and denote the new market clearing interest rate as2

..The marginal product of capital is constant at x. Suppose that2<<1

e) Illustrate in a graph and explain how the demand for capital changes when the borrowers' endowment,, declines