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 borrow and lend at the real interest rate r. This consumer faces a constraint on how much he or she can borrow, much like the credit limit typically placed on a credit card account. That is, the consumer cannot borrow more than x, where x < we – y + t, with we denoting lifetime wealth. Use diagrams to determine the effects on the consumer’s current consumption, future consumption, and savings of a change in x, and explain your results.
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