Question 2 - Consumption and Savings (25 Marks) Suppose a person's life is divided into two main blocks, periods 1 and 2. The consumer desires to perfectly smooth consumption over the two periods, so that a = 0, =c". Income in the two periods is equal to yi = 500 and y2 = 500, and taxes are t = 100 and tz 100. The real interest rate r is 100%. (a) What is the present value of lifetime resources (PVLR)? What is the highest feasible consumption in the current period? What is the highest feasible consumption in the future period? (b) Find the optimal consumption in each period (c) and the amount of saving/borrowing 81. on your findings. Comment (c) What happens to the consumption choices if r drops to 0% and there are no taxes in the first period (ti = 0 and t2 100)? Compute the new value of c* and the amount of saving/borrowing 31. Explain the economic mechanisms at play. (a) Government purchases in the two periods are G1 = 100 and G2 = 0. The government has no debt to start with and assume that in the economy there are 2 identical households. Compute National savings (S) with the parameter values considered in part e above. What is the value of Public Debt (D) at the beginning of the second period