Information required to solve these questions:

4. {16 points} Consider the two-period model. The consumer's preferences over current and future consumption (c and c') are: subject to c+ C! t+yr_trwe 1 + r _ y 1 + a" _ I The consumer's budget parameters are given by y: 150, t= 20, y' = 14, t\" = 241 r = 0.2, where y and y: are current and future income, 15 and t' are current and future lump-sum taxes, :1 is housing wealth in the rst period and r is the real interest rate. 6. (12 points) Continue with the version of the two-period consumption model discussed in question (4). Suppose that y and y' remain at their original values, but 7' increases from 0.2 to 0.5. (a) What is the consumer's lifetime wealth (we) now? Find the new optimal levels of current consumption, future consumption and saving. (b) Using a graph, plot / illustrate the changes in consumption and saving. Be sure to indicate by how much the budget line shifts (horizontally and vertically). (c) Based on the changes you found in parts (a) and (b), in this model is the income effect of an interest rate change stronger or weaker than the substitution effect