Question: Please help with this question. 2. (2 points) Recall the intertemporal budget constraint from homework 1. Consider an individual who lives only two periods. Let

Please help with this question.

2. (2 points) Recall the intertemporal budget constraint from homework 1. Consider an individual who lives only two periods. Let cl > 0 be consumption in period 1 and 02 > 0 be consumption in period 2. Therefore, (chcg) 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 71' 6 (0,1) be the rate of ination. For t = 1, 2, her (perperiod) income is It > 0. In addition to receiving income, she may save or borrow in period 1. Let s E (I2 / (1 + 2'), I1) be the amount that is saved or borrowed in period 1. Suppose that the utility function is 1:. (cl, (:2) = V31 + (/32. (a) Find (Ci, cg) and illustrate graphically your solution. (1 point) (b) What is the effect of an increase in the rate of ination on (CLCE)? (0.5 point) (c) What is the effect of an increase in the nominal interest rate on (CI, CE)? (0.5 point)

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