Consider the aggregate version of the two-period model of consumption presented in class.

a) Write down the aggregate output demand and the aggregate output supply for the current period. Discuss the response of consumption demand to changes in current income (Y), future income (Y,), current and future taxes (T, T'), and the real interest rate (r). For the next sections assume we begin in equilibrium and illustrate using the graph for the relevant market the impact of the following shock. Provide a brief description of the economic forces at work. Notice that the government needs to meet its lifetime budget constraint.

b) An increase in G financed through an increase in T. Use the goods market.

c) An increase in G financed through an increase in T'. Use the goods market.

d) An increase in G financed through an increase in B (government borrowing). Use the financial market.