Hello, please answer parts 1-4. To clarify, when question 4 says "will behave as in part 3", it is referring to the question above that, question 3 where the government is being generous and pays transfers T1> 0andT2> 0.

Here is the problem and the corresponding questions:

There is a consumer who lives for two periods. His income is given byY1andY2. He has access to the credit market with the interest rate r.

The government collects lump-sum taxesT1andT2(note thatT1andT2might be negative meaning that the government makes a transfer). The government can run a surplus or a deficit, but must borrow (or save) in the credit market at the interest rate r.

1. Write down the government intertemporal budget constraint. Note that the government also has access to the credit market. Write down the consumer's budget constraint. Show the consumption choice graphically.
2. Imagine that the government increases the taxes in period 1 and introduces a tax cut in period 2 to pay back any debt and interest from the previous period. This is anticipated by consumers. Show the new consumption choice. How does that compare to the result from the previous section.
3. Assume that the government is not constraint by the balanced budget and can have deficit in both periods. Now the government is being generous and pays transfersT1> 0andT2> 0. Show the new consumption choice.
4. Now assume that consumers believe the government will behave as in part 3, but in the second period the government is forced to settle the deficit (note that the government has to pay back the interest rate). What will happen to the consumption choice? Are the consumers better off?