Problem (1), Mankiw chapter 16, page 462.

1. According to the Fisher model, consumers must satisfy an intertemporal budget constraint in which the present discounted value of consumption equals the present discounted value of income (Mankiw pages 440-441). For Jill this means 100 + 100/(1+r) = 210/(1+r). Multiplying both sides of this equation by (1+r) and solving yields r = 10 percent.
2. Any change in the interest rate will create a substitution effect and possibly an income effect. In particular, if the interest rate increases, then the substitution effect will induce the consumer to consume more in the second period and less in the first period. For a saver, the income effect will induce the consumer to consume more in both periods. For a borrower, the income effect will induce the consumer to consume less in both periods. Jack is neither a saver nor a borrower, so he feels only the substitution effect. Jack will therefore consume less in the first period. Careful plotting of his old and new budget lines, and his old indifference curve, shows that Jack is slightly better off than before the interest rate rise. He can reach a point slightly above his old indifference curve.
3. Jill is a borrower, so she will feel both substitution and income effects. Both effects induce her to consume less in the first period. Careful plotting of her old and new budget lines, and her old indifference curve, shows that Jill is clearly worse off than before the interest rate rise. She cannot attain her old indifference curve.

Problem (1), Mankiw chapter 17, page 484. The formula for the rental price of capital is given on page 466. The formula for the cost of capital is given on page 467.

	Rental rate	Cost of capital	Investment spending
a. Anti-inflationary monetary policy raises the real interest rate.	no change	increase	decrease
b. An earthquake destroys part of the capital stock.	increase	no change	increase
c. Immigration of foreign workers increases the size of the labor force.	increase	no change	increase

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