Question II

Question II (27 points) Assume that Assume an economy with a representative agent, called Leslie, that lives for two periods. She is heading to the one store in town to purchase to purchase today's consumption of wales, with her income. Leslie knows her current income, but can only make a prediction about her future income. The interest rate in this economy is given by the following function r=3ly1y1)_1 Elva go) 1. If ya = 60, 9'1 2 85, go 2 91 = 10, what is the equilibrium interest rate? (2 points) 2. How much is the government taxing in both periods? Explain[6 points] 3. On her way to the restaurant, she meets April, who is very gloomy and only sees things going downhill in the future. April predicts that everyone will be poorer in the future. If Leslie believes her, does this affect her consumption? What about the interest rate? (7 points) 4. The government believes that the shock is going to happen, and so it decides to cut taxes in the future. How will this tax policy affect Leslie's consumption? (5 points) 5. Leslie does not take April's warnings seriously, but as it turns out, she should have. If Leslie was already saving money in the previous period, does the shock affect her? Explain Why or Why not {7 points)