Distortionary Tax and Ricardian Equivalence

3 Distortionary Tax and Ricardian Equivalence Assume utility' is given by U'(c,c') 2 inc + lnc" with {3 E (0,1]. The government collects consumption taxes and issues bonds so that its budget constraints are 9 = ta + 1!) (today) and 9f + (1 +r)b = t'c' (tomorrow). Household budget constraint today is (1 +t)c+ s = y and tomorrow (1+t')c' :y\"+(1+r)s 1. Try solving for c and c'. 2. Show the household optimal consumption plan in a diagram with a lifetime budget line and an indifference curve. 3. When t decreases and t' increases given xed government spendings, do you think the Opti- mal consumption plan remains the same? What does this result imply about the Ricardian Equivalence