Question: Suppose a person's life is divided into two main blocks, periods 1 and 2. The consumer does not desire to perfectly smooth consumption over the

Suppose a person's life is divided into two main blocks, periods 1 and 2. The consumer does not desire to perfectly smooth consumption over the two periods. In particular, preferences are such thatc2= 0.5c1. Income in the two periods is equal toy1= 500 andy2= 1000, and income taxes are proportional1= 50% and2= 50%. The real interest rate isr= 0%.

(c) What happens to the consumption and saving choices if the real interest rate isr= 100% and there are no taxes (1=2= 0%)? Comment on your findings.

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