1. (20 marks Consider a two-period exchange economy in which m consumers are each endowed with (y, y) of the consumption good and face lump-sum taxes (t, t') in the two periods. The government purchases consumption goods (G,G') in the two periods, and uses total tax revenues (T, T'), and deficits to fund them. Consumers and government face the same interest rate r when borrowing or lending. The credit market clears. (a) (10 marks) State and show the result of Ricardian Equivalence using the government and the consumer present value constraints. (b) (10 marks) Suppose now that consumers face an interest rate only when bor- rowing and an interest rate p when lending, where > Derive and show the consumer budget constraint on a graph for a typical consumer. Does Ricardian Equivalence hold here? Explain. 1. (20 marks Consider a two-period exchange economy in which m consumers are each endowed with (y, y) of the consumption good and face lump-sum taxes (t, t') in the two periods. The government purchases consumption goods (G,G') in the two periods, and uses total tax revenues (T, T'), and deficits to fund them. Consumers and government face the same interest rate r when borrowing or lending. The credit market clears. (a) (10 marks) State and show the result of Ricardian Equivalence using the government and the consumer present value constraints. (b) (10 marks) Suppose now that consumers face an interest rate only when bor- rowing and an interest rate p when lending, where > Derive and show the consumer budget constraint on a graph for a typical consumer. Does Ricardian Equivalence hold here? Explain