Consider a two-period small open endowment economy with free capital mobility. Households live for one period. The endowment is 10 in both periods. The utility function of households living in period 1 is lnC1 and that of households living in period 2 is lnC2. The government lives for 2 periods and has access to the world financial market, where the interest rate is 10 percent r = 0.1. Government spending is 2 in both periods (G1 = G2 = 2). The government levies lump-sum taxes in periods 1 and 2, denoted T1 and T2, respectively. Finally, assume that households and the government start their lives with no debts or assets.
(a) Suppose that T2 = 1. Calculate T1.
(b) Find the primary fiscal surplus in period 1.
(c) Calculate consumption in periods 1 and 2.
(d) Calculate the trade balance and the current account in period 1 (TB1 and CA1).

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a The smalleconomy is given for two periods and is open for trade having free mobility in the capita... View the full answer