申論題

1.Consider a two-period endowment model with income (y and y') and the consumer pays lump-sum tax (t and t') in the current and future period, respectively. The consumer chooses consumption (C and C') in the current and future periods, and saving (s) in the current period. The real interest rate is r. Consider that a representative consumer lives in this two-period economy and has a convex preference over the current and future consumption. [50 pts]

(c) Consider an increase in the real interest rate. Draw the new budget constraint in the figure, and show how it affects the consumer's intertemporal decisions on C, C', and s? Explain your answer with income and substitution effects, and show how it matters whether the consumer is initially a borrower or a lender. [10 pts]