Question: For this question assume that inflation is zero. Consider a 2-period economy. Assume that consumers lifetime utility is given by Assume that the consumer starts

For this question assume that inflation is zero. Consider a 2-period economy.

Assume that consumers lifetime utility is given by

Assume that the consumer starts period 1 with the initial wealth of 40,000.

The consumer gets labour income in period t (t=1,2).

, , and R=0.

Initially assume that there are no borrowing constraints.

Write down the Euler equation (with all values substituted) and explain its meaning. Write the intertemporal budget constraint (with all values substituted) and explain its meaning. (2 marks)

Solve consumers problem of maximizing lifetime utility subject to the

intertemporal budget constraint. Is the present value of consumption in the first and the second periods the same? Explain why. (3 marks)

If for some reason the consumer were facing the borrowing constraint, would it be binding? Explain. (2 marks)

Explain what the Ricardian equivalence is. Does it hold for the consumer above who doesnt face the borrowing constraint? What about the consumer who faces the borrowing constraint? Explain. (3 marks)

In its 2022 mini budget the UK government announced tax cuts for the high-income earners. Given that the objective was to boost the economy, do you think it was a wise policy? Explain. (5 marks

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