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[See Solution] Following the financial crisis, the default rate becomes 20% or a = 0.80 Calculate r 2 Let we 1 denotes the lifetime wealth of a borrower and we

Question: Following the financial crisis, the default rate becomes 20% or a = 0.80

  1. Calculate r 2
  2. Let we 1 denotes the lifetime wealth of a borrower and we 2 denotes the lifetime wealth of a lender. Compute Kate’s lifetime wealth depending on whether she is a lender or a borrower
  3. Draw Kate’s intertemporal budget constraint
  4. It can be shown that following the increase in the interest rate, Kate will remain a borrower. Using the lifetime wealth of a borrower, compute Kate’s optimal consumption and savings. Illustrate your answer in a diagram. Compare this with question 1.b

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