Two students will have $210000(!) one year from now. Current borrowing rates are at 5%. Student 1 is a light borrower and borrows $50000 for consumption now. Student 2 is a heavy borrower and borrows $150000 for consumption now. Consumption now and in the future are normal goods, and preferences have our typical assumptions (convex, etc).

a. Draw the budget line with intercepts and illustrate the two students indifference curves at their chosen consumption bundles.

b. Suppose the Biden administration drops borrowing rates to 2.5% for the first $100000 borrowed, after which rates go back to 5%. What would our models predict would happen to borrowing (present consumption) for both of these students and explain why? You dont need to draw a graph to answer this question but you could if you want.

c. What would our models predict would happen to future consumption for both of these students and explain why? You dont need to draw a graph to answer this question but you could if you want.