Suppose a consumer lives for two periods. At the beginning of the current period, her parents give her a bequest W>0W>0, which is subject to a proportional inheritance tax at rate tt. In the future period, she is set to receive social security transfers TT from the government. Additionally, she earns labor income yy in the current period and y′y′ in the future period. Her consumption in the current and future periods is denoted b cc and c′c′, respectively.
Question 19.1
Letss denote the consumer's savings (if s≥0s≥0) or her debt (if s<0s<0) at the end of the current period. What is her current-period budget constraint?
19.2 : Let rr represent the real interest rate in terms of current consumption, applied equally to both savings and debt. Suppose the consumer can no longer newly save or borrow money in the future period. What is the consumer's budget constraint for the future period?
19.3 : Find the consumer's intertemporal budget constraint.