Consider the consumption-savings model from chapter 1, with one change: there is a proportional tax on interest earnings in the second period, where the tax rate is given by t, and t > 0. The tax is only applied in the case where the household earns positive interest income in the second period. If the household's interest income is negative, the household pays zero taxes. Everything else about the model is the same as in the notes.

A) Draw a representative indifference curve. Do not include the budget line on your diagram. Are these preferences monotonic? Explain, and illustrate your answer on the diagram

B) Draw the budget line. Do not include any indifference curves on your diagram. Explain your diagram

C) Draw diagrams depicting the optimal choices. Put each case on a separate diagram. Explain.

D) Evaluate the following statement: "An increase in tax rates will cause consumption to rise."