Assume that we are modeling inter-temporal consumption for a typical consumer. Further assume that we measure current consumption on the horizontal axis and future consumption on the vertical axis. A market exists where borrowing and lending can occur for a fixed interest rate, r. When a consumer has access to financial markets so that he/she can lend or borrow money, his/her budget constraint is expanded when compared to his/her budget constraint without access to financial markets.

Question

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Access to financial markets allows the consumer to borrow or lend money, which expands their budget constraint and allows them to consume more in the present or future. When a consumer has access to financial markets, he/she can borrow or lend money to finance current or future consumption, expanding his/her budget constraint beyond what is possible when not having access to financial markets.

Assume That We Are Modeling Inter-Temporal Consumption for a Typical