# Question: Assume a two period model where national income is 100 in

Assume a two-period model where national income is 100 in the current period, and 120 in the future period. The world real interest rate is assumed to be 10% per period. The representative consumer always wishes to set current consumption plus government spending equal to future consumption plus government spending (C + G = Coe + G'), which implies perfect-complements preferences.

(a) Determine consumption plus government spending in the current and future periods, and the current account surplus. Draw a diagram to illustrate your results.

(b) Now, suppose that the world real interest rate increases to 20% per period. Again, determine consumption plus government spending in the current and future periods and the current account surplus, and show these in your diagram.

(c) Explain the difference in your results in parts (a) and (b).

(a) Determine consumption plus government spending in the current and future periods, and the current account surplus. Draw a diagram to illustrate your results.

(b) Now, suppose that the world real interest rate increases to 20% per period. Again, determine consumption plus government spending in the current and future periods and the current account surplus, and show these in your diagram.

(c) Explain the difference in your results in parts (a) and (b).

## Relevant Questions

Use the first model in this chapter to answer this question. Suppose that governments in the rest of the world impose a tax on lending to foreigners. Determine how this affects consumption plus government spending in the ...Suppose, in the second model in this chapter, with production and investment, that there is an increase in credit market frictions, as studied in Chapter. What are the effects on aggregate output and the current account ...The domestic central bank increases the supply of money under a flexible exchange rate regime, leading to a depreciation of the nominal exchange rate. If the government had imposed capital controls before the increase in the ...Suppose, in the monetary intertemporal model, that the government can pay interest on money, financing this interest with lump-sum taxes on consumers. If the nominal interest rate on money is the same as the nominal interest ...Suppose that the economy is in a long-run equilibrium where the inflation rate is greater than the optimal rate i*, and then the central bank acts to reduce the inflation rate to i*.(a) Suppose that the central bank decides ...Post your question