Question: 2. Explain how you derive the intertemporal budget constraint: C2 Ako a+ 3-k+ 1+r 1+r Given this budget constraint, characterize the optimal capital investment

2. Explain how you derive the intertemporal budget constraint: C2 Ako a+

2. Explain how you derive the intertemporal budget constraint: C2 Ako a+ 3-k+ 1+r 1+r Given this budget constraint, characterize the optimal capital investment k of the country. Explain why it is possible to determine optimal investment without characteriz- ing the optimal consumption-savings decision (in other words, why investment and savings decisions separate). Why do we expect a country with a very high A to run a current account deficit? What may be real-world examples of such countries? 3. Characterize the optimal consumption choice for a given interest rate r. How does a reduction in r affect the optimal consumption and investment decisions and why? What are the implications for the current account? 4. Without doing algebra, explain the notion of the autarky interest rate in this economy? What happens to consumption, investment and current account if the world interest rate r>r?

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