Question: For Jimmy both current and future consumption are normal goods. He has strictly convex and strictly monotonic preferences. The initial real interest rate is positive.

For Jimmy both current and future consumption are normal goods. He has strictly convex and strictly monotonic preferences. The initial real interest rate is positive. If the real interest rate falls, in each of the following cases, argue what will happen to his period 2 consumption level? Clearly illustrate your argument on a graph.

(i) He is initially a borrower.

(ii) He is initially a lender.

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