Jack and Jill both obey the two-period Fisher model of consumption. Jack earns $100 in the first period and $100 in the second period. Jill earns nothing in the first period and $210 in the second period. Both of them can borrow or lend at the interest rate r.
a. You observe both Jack and Jill consuming $100 in the first period and $100 in the second period. What is the interest rate r?
b. Suppose the interest rate increases. What will happen to Jack’s consumption in the first period? Is Jack better off or worse off than before the interest-rate rise?
c. What will happen to Jill’s consumption in the first period when the interest rate increases? Is Jill better off or worse off than before the interest-rate increase?