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2. Consider an individual who lives only two periods. Let c1 > 0 be consumption in period 1 and C2 > 0 be consumption in period 2. Therefore, (01,02) is the (intertemporal) consumption bundle. Let 331 be the price of the good in period 1. In period 2, the price is higher due to ination. Let r 6 (0,1) be the rate of ination. For t = 1,2, her (per-period) income is I, > 0. In addition to receiving income, she may save or borrow in period 1. Let s E (12/(1+z'),11) be the amount that is saved or borrowed in period 1. If she saves (i.e., s > 0), then she receives back her savings plus interests at the beginning of period 2. If she borrows (i.e., s Ig/pg in period 2. What is p2 in this problem? (b) The individual decides to borrow when she wishes to consume c1 > Il/pl in period 1. Note that the individual is not allowed to borrow more than 1'2 / (1 + i). In other words, there is no default in this problem. Why? (a) Suppose that the individual saves, i.e., s 6 (0,11]. Write down an equation for the intertemporal budget line (i.e., an equation in terms of 01 and 02). (1 point) (b) Suppose that the individual borrows, i.e., s E [12/ (1 + 0,0). Write down an equation for the intertemporal budget line (i.e., an equation in terms of 01 and c2). (1 point) (c) Sketch the intertemporal budget line. Clearly label your graph. (1 point) (d) Show graphically the effect of an increase in ination on the budget set. (1 point)