Raphael is a professor who teaches physics at a university where he is paid a yearly salary of $200,000. He plans to take the next year off to write a book, so he won't earn any money next year. He is currently trying to figure out how much of this year's salary he should save for next year. Disregard any tax considerations, and disregard what happens after next year. In other words, assume that next year, Raphael will consume whatever he saves, plus any interest, and that he's not thinking beyond next year. The following graph shows Raphael's preferences for consumption this year and next year. Suppose initially Raphael cannot earn interest on the money he saves. Use the green line (triangle symbol) to plot Raphael's budget constraint (BC) on the following graph. Then use the black point (plus symbol) to show his optimum consumption bundle. Note: Dashed drop lines will automatically extend to both axes. CONSUMPTION NEXT YEAR (Thousands of dollars) 240 220 200 180 160 140 120 100 80 60 40 20 0 H 0 20 40 60 80 100 120 140 160 180 200 220 240 CONSUMPTION THIS YEAR (Thousands of dollars) BC (0% Interest) ++ Initial Optimum (0% Interest) BC (20% Interest) New Optimum (20% Interest) ? Now suppose Raphael can earn 20% real interest on any money he saves. Use the blue line (circle symbol) to plot his new budget constraint (BC) on the previous graph. Then use the grey point (star symbol) to plot his optimum consumption bundle at this interest rate. (Hint: To plot BC, think about how much money Raphael would have next year if he saved his entire income this year.) Using the previous graph, complete the following table by indicating how much Raphael should save of his current income when he cannot earn any interest on his savings and when he can earn 20% interest on his savings. Interest Rate Amount Raphael Saves (Percent) (Dollars) 0 20 Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? All consumers, including Raphael, save more money when interest rates are high, because they get a higher return on that investment. In this case, Raphael saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high. All consumers, including Raphael, save less money when interest rates are high, because they don't need to save as much money to have the same future income. In this case, Raphael saves less money when interest rates are high. However, consumers with different preferences might save more money when interest rates are high.