I just need response to question E.

Fisher 2-period life cycle model:

An individual (who is representative of all the other individuals in the economy) lives for two periods. Period 1 is young, Period 2 is old. Assume that the real interest rate on savings and borrowing is r = 0.05.

(a) If income in the first period of life is Y1 = 10 and income in the second period is Y2 = 15, write down the intertemporal budget constraint.

(b) If the lifetime utility function of the representative agent is U(C1, C2) = (C1 ? C2) 0.5 , calculate the optimal levels of C1 and C2 given the intertemporal budget constraint from part (a). Is the agent a saver or a borrower?

(c) What are the optimal levels of C1 and C2 if the agent is borrowing constrained (i.e. S ? 0)?

(d) What would be the effect on consumption C1 and C2 of a government policy that increased income in the second period of life to Y2 = 20?

(e) What would be the effect on consumption C1 and C2 of a government policy that increased income in the second period of life to Y2 = 20 and implemented a loan program that allowed S < 0? That is, the government facilitated borrowing for all possible points on the new intertemporal budget constraint. Why does this answer differ from that of part (d)?