Problem
This question considers financial market imperfections. Assume that the agent must pay a higher rate to borrow (at rate rb) than he receives when he lends (at rate r). Let y+tr denote current after- transfer income, and y'+tr' denote future after-transfer income.
Write the budget constraint separately for two periods. Draw the budget constraint, and label the intercept of the budget constraint with two axis. Label current and future after-transfer income on the budget constraint curve. Draw an agent's choice between current and future consumption such that this agent is saving today.