There is a consumer who lives for two periods. His income is given by Y1 and Y2. He has access to the credit market with the interest rate r.
The government collects lump-sum taxes T1 >0 and T2 >0. The government can run a surplus or a deficit, but must borrow (or save) in the credit market at the interest rate r. Assume that the government is not constraint by the balanced budget and can have deficit in both periods. Now the government is being generous and pays transfers T1 < 0 and T2 <0. Show the consumption choice.