QUESTION 3 Suppose that . y =100 (income today) a y' = 150 {income tomorrow) . r = 10% (interest rate on bonds) . t= 10(taxes today) a t' = 10 (taxes tomorrow) The consumer is choosing optimally (c.c'), and her preferences are the same as the ones described in Lecture 3. Suppose that y' all of sudden becomes 200. How does 5 change? 0 s will have a W93: if the value of income grows tomorrow, I want to save some more money. so that tomorrow I will consume a lot 0 s will have a positivejhage: if the present value of income grows. I want to save some for the future 0 s will have a negatiyejhange: the present value of income is growing. so the consumer wants to increase consumption both today. and tomorrow. Since y did not change. the only way to increase consumption today is to diminish s O QUESTION 5 In the US. national accounting system. durable goods (such as cars). are counted as an investment, rather than a consumption good QUESTION 7 The government budget constraint in present value is... OG=T G'=T' OG+G'=T+T' o G+G'/(1+r) = T+ T'/(1+r} O G+G'/(1+r) = T+ T