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A consumer receives income yin the current period and income y in the future period, and pays taxes of tand t in the current and
- A consumer receives income yin the current period and income yin the future period, and pays taxes of tand tin the current and future periods, respectively. The consumer can borrow and lend at the real interest rate r. This 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<wey+t, with wedenoting lifetime wealth. Use diagrams to determine the effects on the consumer's current consumption, future consumption, and saving of a change in x, and explain your results. Present analysis when the constraint is binding and when it is not binding.
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