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 lend at the real interest rate r1. However, he or she can borrow at the interest rate r2, where r2> r1. The government has spending G in the current period and G' in the future period. This spending isnanced through taxes and debt. Government faces an interest rate of r1to borrow.

(a)(5 points)Draw the lifetime budget constraint of the individual

(b)(15 points)Suppose that the government decreases the current period taxes without any change in government spending. What are the effects of this change on consumption and saving decisions of individuals? What happens to welfare? Analyze the effects for a lender and a borrower separately.