Assume a two-period small open economy in which households have logarithmic preferences, U=In(C1)+Bln(C2) where B 0...

 

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Assume a two-period small open economy in which households have logarithmic preferences, U=In(C1)+Bln(C2) where B<1 is the subjective discounting factor. Suppose that households receive a constant endowment over time equal to Q>0 (so Q₁ = Q2 = Q). Suppose that every household starts period 1 with a nonzero net asset position (1+ro)B*0# 0. Finally, assume that the country enjoys free capital mobility and that the world interest rate is r*. a) Assumeß=0.91, Q= 10 and ro-r* = 0.10. Suppose that every household starts period 1 with a negative net asset position equal to (1+ro)B*0=10 (minus 10). With these values, calculate the equilibrium values of consumption (C₁), the trade balance (TB₁), and the current account in period 1 (CA₁). Do not forget to show step by step your algebraic calculations. No credit without explanation. b) Suppose now that (1+ro)B*0= 0 rather than 10. Calculate the effect of this reduction in the initial external debt on the equilibrium values of consumption (C₁), the trade balance (TB₁), and the current account in period 1 (CA₁). Do not forget to show step by step your algebraic calculations. No credit without explanation. c) Provide an intuitive explanation of why the equilibrium values of consumption (C₁), the trade balance (TB₁), and the current account in period 1 (CA₁) change between parts 3.a and 3.b. Assume a two-period small open economy in which households have logarithmic preferences, U=In(C1)+Bln(C2) where B<1 is the subjective discounting factor. Suppose that households receive a constant endowment over time equal to Q>0 (so Q₁ = Q2 = Q). Suppose that every household starts period 1 with a nonzero net asset position (1+ro)B*0# 0. Finally, assume that the country enjoys free capital mobility and that the world interest rate is r*. a) Assumeß=0.91, Q= 10 and ro-r* = 0.10. Suppose that every household starts period 1 with a negative net asset position equal to (1+ro)B*0=10 (minus 10). With these values, calculate the equilibrium values of consumption (C₁), the trade balance (TB₁), and the current account in period 1 (CA₁). Do not forget to show step by step your algebraic calculations. No credit without explanation. b) Suppose now that (1+ro)B*0= 0 rather than 10. Calculate the effect of this reduction in the initial external debt on the equilibrium values of consumption (C₁), the trade balance (TB₁), and the current account in period 1 (CA₁). Do not forget to show step by step your algebraic calculations. No credit without explanation. c) Provide an intuitive explanation of why the equilibrium values of consumption (C₁), the trade balance (TB₁), and the current account in period 1 (CA₁) change between parts 3.a and 3.b.

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a Assume091 Q 10 and r0r 010 Suppose that every household starts period 1 with a negative net asset position equal to 1r010 minus 10 With these values calculate the equilibrium values of consumption C ... View the full answer