1 Assume i 0 , beta 1 Consumer has income of 80 in year 1, 100 in year 2 Now suppose gov't gives consumers a free check of 10 in year 1 Suppose consumers are naive (they don't anticipate the free check is financed by borrowing from China, which needs to be paid back through more tax in period 2), consumer will consume in year 1 Hint when consumers are naive, they will believe they have 80 10 90 income in period 1, and 100 income in period 2 2 Assume i 0 , beta 1 Consumer has income of 80 in year 1, 100 in year 2 Now suppose gov't gives consumers a free check of 10 in year 1 Suppose consumers are naive (they don't anticipate the free check is financed by borrowing from China, which needs to be paid back through more tax in period 2) Consumer actually consumes in year 2 Hint when consumers are naive, they will believe they have 80 10 90 income in period 1, and 100 income in period 2 Hint 2 when year 2 comes, gov't needs to pay back the debt

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1  Assume i 0 , beta 1  Consumer has income of 80 in year 1, 100 in year 2  Now suppose gov't gives consumers a free check of 10 in year 1  Suppose consumers are naive (they don't anticipate the free check is financed by borrowing from China, which needs to be paid back through more tax in period 2), consumer will consume      in year 1  Hint  when consumers are naive, they will believe they have 80 10 90 income in period 1, and 100 income in period 2  2  Assume i 0 , beta 1  Consumer has income of 80 in year 1, 100 in year 2  Now suppose gov't gives consumers a free check of 10 in year 1  Suppose consumers are naive (they don't anticipate the free check is financed by borrowing from China, which needs to be paid back through more tax in period 2)  Consumer actually consumes      in year 2  Hint  when consumers are naive, they will believe they have 80 10 90 income in period 1, and 100 income in period 2  Hint 2  when year 2 comes, gov't needs to pay back the debt

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1. Assume i=0%, beta=1. Consumer has income of 80 in year 1, 100 in year 2. Now suppose gov't gives consumers a free check of

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