Consumers typically pay a higher real interest rate to borrow than they receive when they lend (by
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Consumers typically pay a higher real interest rate to borrow than they receive when they lend (by making bank deposits, for example). Draw a consumer's budget line under the assumption that the real interest rate earned on funds lent, \(r_{1}\) is lower than the real interest rate paid to borrow, \(r_{b}\). Show how the budget line is affected by an increase in \(r_{1}\), an increase in \(r_{b}\), or an increase in the consumer's initial wealth.
Show that changes in \(r_{l}\) and \(r_{b}\) may leave current and future consumption unchanged. Draw the consumer's indifference curves so that the consumer initially chooses the no-borrowing, no-lending point.
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