Gabe and Gita both obey the two period Fisher model of consumption. Gabe earns $100 in the first period and $100 in the second period. Gita earns nothing in the first period and $210 in the second period. Both of them can borrow or lend at interest rate r.
a. You observe both Gabe and Gita consuming $100 in the first period and $100 in the second. What is the interest rate r?
b. Suppose the interest rate increases. What will happen to Gabe’s consumption in the first period? Is Gabe better off or worse off than before the interest rate rise?
c. What will happen to Gita’s consumption in the first period when the interest rate increases? Is Gita better off or worse off than before the interest rate increase?