A consumer receives income y in the current period, income y' in the future period, and pays taxes of t and t' in the current and future periods, respectively. The consumer can lend at the real interest rate r. The consumer is given two options. First, he or she can borrow at the interest rate r but can only borrow an amount x or less, where x < we – y + t. Second, he or she can borrow an unlimited amount at the interest rate r2, where r2 > r. Use a diagram to determine which option the consumer chooses, and explain your results.
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