James allocates endowments of income between consumption today and consumption tomorrow by trading in a competitive capital market at interest rate i. i Illustrate his consumption opportunities in a diagram with dollars of consumption today on the x axis and dollars of consumption tomorrow on the y axis. ii Under what circumstances will James just consume his income endowments in each period? iii If James does not initially borrow or lend, will a rise in the market interest rate ever cause him to become a lender? Will he always be better off after the interest rate rises? iv Explain what conditions on preferences are required for James to lend less when the interest rate rises if he is initially a lender. v What happens to wealth measured in current dollars when the interest rate rises? What happens to wealth measured in future dollars when the interest rate rises? vi Explain what determines whether individuals enter the capital markets as borrowers or lenders. What role do financial securities play? vii Illustrate the change in James' consumption opportunities when transactions costs drive a wedge between the borrowing and lending rates of interest, with iB=iL. viii Identify the benefits to James, measured in current dollars, from introducing a capital market. Is it the same for all consumers? ix What determines the market rate of interest?