(c) Determine what the consumer's optimal current

period and future

period
consumption are, and what optimal saving is, and show this in a diagram with the
consumer's budget constraint and indifference curves. Is the consumer a lender or a
borrower?
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22)
Consider the following effects of an increase in taxes for a consumer.
(a) The consumer's taxes increase by x in the current period only. How does this affect
current consumption, future consumption, and current savings?
(b) The consumer's taxes increase permanently, increasing by x in the current and future
period. Using a diagram, determine how this affects current consumption, future
consumption, and current savings. Explain the differences between your results here and
in part (a).
23)
A consumer receives income y in the current period, income y' in the future period, and
pays taxes t and t' in the current and future period, respectively. The consumer can lend at
the real interest rate r
1.
The consumer is given two options. First, he or she can borrow at
interest rate r
1
but can only borrow an amount x
<
we

y
+
t. Second, he or she can borrow
an unlimited amount at the interest rate r
2
, where r
2
>
r
1
. Use two diagrams to determine
which option the consumer chooses, and explain your results.
24)
Assume an economy with 1000 consumers. Each consumer has income in the current
period of 50 units and future income of 60 units and pays lump

sum tax of 10 in the
current period and 20 in the future period. The market real interest rate is 8%. Of the 1000
consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future.
(a) Determine each consumer's current consumption and current saving.
(b) Determine aggregate private saving, aggregate consumption in each period,
government spending in the current and future periods, the current period government
deficit, and the quantity of debt issued by the government in the current period.
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