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A consumer is endowed with income M1 in the present and M2 in the future, with...

A consumer is endowed with income M1 in the present and M2 in the future, with M1 = M2 > 0. C1 and C2 are consumption in the present and future, respectively. The consumer has convex indifference curves, described by U(C1, C2), and can borrow and save at the nominal rate of interest of r > 0. (i) Use an isoquant diagram to carefully illustrate the optimal consumption choice when the consumer is a lender in the present (6 points). (ii) Assume the rate of interest increases. Carefully illustrate the consumer’s new optimal consumption choice on your diagram above.

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