Information required to solve the problem:

7. (12 points) Continue with the version of the two-period consumption model discussed in question (4). (a) Calculate the present value of the consumer's tax expenditures. (13) Suppose that the government reduces t from 20 to 10, but does not change cur- rent or future governient purchases. What happens to the present value of tax expenditures, and what happens to t'? (c) Find the new optimal values of current consumption and saving. Briey explain. 4. {15 points) Consider the two-period model. The consumer's preferences over current and future consumption (c and c!) are: subject to 1 + 1' + 1 + a" The consumer's budget parameters are given by y = 150, t: 20, y' = 144, t' = 24, r = 0.2, where y and y; are current and future income, t and ti are current and future lump-sum tastes1 a is housing wealth in the rst period and 7' is the real interest rate