Question: Consider a consumer maximising a two-period consumption functionU(C 0 ,C 1 ) sub- ject to the income stream{Y 0 ,Y 1 }and interest rater. (a)Show

Consider a consumer maximising a two-period consumption functionU(C0,C1) sub- ject to the income stream{Y0,Y1}and interest rater.

  1. (a)Show diagrammatically that for this consumer a rise in income in any one period will lead to a rise in consumption in both the periods.
  2. (b)What effect does a rise in interest rate have on consumption in period 1? Explain

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