Q2. GSL, Chapter 9, Question 2 Consumption with Borrowing Constraints Consider the following consumption-savings problem. The consumer maximizes max In Ct + B In Ct+1 Ct. Ct+1-St subject to the lifetime budget constraint C+ + : Ct+1 = Yet Yt+1 1+ it 1 + it and the borrowing constraint Ct S Yt. This last constraint says that savings cannot be negative in the first period. Equivalently, this is saying consumers cannot borrow in the first period. (a) Draw the budget constraint. (b) Assuming the constraint does not bind, what is the Euler equation? (c) Using the Euler equation, lifetime budget constraint and borrowing constraint, solve for the period t consumption function. Clearly state under what circumstances the borrowing constraint binds. (d) Suppose Y = 3, Yr+/ = 10; B = 0.95 and r = 0.1. Show the borrowing constraint binds. (e) Suppose there is a one time tax rebate that increases Y, to 4. Leave Yr+1 = 10; B = 0.95 and 7 =0.1. What is the marginal propensity to consume out of this tax rebate