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3. Consider an individual who lives for two periods. His income in the first period is...

3. Consider an individual who lives for two periods. His income in the first period is !Y1 and his

income in the second period is Y2. His consumption in the first period is !C1 and his consumption

in the second period is C2. He can lend and borrow at zero real interest (!r = 0 ).

(a) Write his budget constraint (again, assume !r = 0 ).

(b) Assume that the government collects a lump sum tax of !T units in the first period. What will

happen to his consumption in the first period? What will happen to his consumption in the

second period?

(c) What will happen to his consumption in the first period if the government decides to collect

the tax (of T units) in the second instead of the first period?

(d) Will you change your answer to (c) if the interest rate was positive (r >0 )?

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