5. Intertemporal Trade: Consider the intertemporal model with two time periods t=0 and t=1. Home is a small open economy that can borrow and lend in the first period at a fixed world real interest rate of 4%. In the first period output is Q0=800. Because of a recession, output in the second period is expected to fall to Q1=500. The country wants to smooth consumption as much as possible. The country begins with no external assets or liabilities. Finally, assume that the intertemporal utility function at Home is U(C0; C1)=min{C0;C1}.

a. Solve for consumption, the current account, and financial account in the first period (t=0).

b. Solve for the trade balance, current account, and financial account in the second period (t=1).

c. Would Home be better off or worse off if the world interest rate is 1% instead of 4%? Explain using the appropriate equations.