1. Consider the two-period model. Suppose that the interest earnings are taxed (or the private debts receive credit). That is the lenders and borrowers are facing effective real interest rate (1 x) r, where 0 x 1 is the tax rate for a lender, and is the credit for a borrower. Write down the current and future budget constraints, and derive the lifetime budget constraint. How does the implementation of interest tax (or credit) affect current consumption, future consumption and saving? Use diagrams to show how your results depend on income and substitution effects and consider the case where the consumer is initially a borrower or a lender. Problem 2. A consumer receives income y in the current period, income y in the future period, and pays taxes of t and t in the current and future periods, respectively. The consumer can borrow and lend a the real interest rate r. However, the consumer faces a constraint on how much he or she can borrow, much like the credit limit typically placed on a credit card account. That is, the consumer cannot borrow more than x, where x < we(y t), with we denoting lifetime wealth. How does the lifetime budget constraint look like? Use diagrams to illustrate the effect of an increase in the borrowing limit x on current consumption, future consumption and saving, and explain your results