Suppose a household solves the following two-period consumption-savings problem with taxes: max u(c) Bu(c2) C1,a,C2 Subject to a+c1 = ao+y1 - T1 C2 = 2 T2+(1+r)a with u(c), where: c is consumption at time 1, c2 is consumption at time 2, y is income at time 1, y2 is income at time 2, are taxes at time 1, T2 are taxes at time 2, and do is initial wealth. 1. Solve for the household's choice of C1, C2 and a in closed form 2. How does c/y depend on y2? What would happen if households suddenly become opti- mistic about the future? 3. How does c/y depend on ao? Please give economic intuition. 4. How does c/y depend on ? Please give economic intuition.