Assume that Barney feels current and future consumption are perfect substitutes. His indifference curves are therefore linear, with = + . His disposable income is equal to 1 in every period. Barney faces an interest rate if he wants to save, and if he wants to borrow, with > . He is currently choosing an optimal allocation which we will call A. The government (which never defaults and therefore can always lend and borrow at the rate ) decides to increase taxes in the first period by an amount equal to 0.5, while reducing them in the future period by an amount equal to 0.5(1 + ), in such a way that the government budget constraint is still satisfied. Barney now chooses an optimal allocation which we will call B.

Which statement/s is/are true?

a. Barney is a lender in A, remains a lender in B.

b. Barney is a lender in A, becomes a borrower in B.

c. Barney is consuming his disposable income in both periods in A, he is a borrower in B.

d. Barney is consuming his disposable income in both periods in A, and in B.

e. Barney is a borrower both in A and B.

(there can be more than one answer)