Consider the Inter-temporal 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 the world real interest rate of 2%. In the first period, output is Y0 = 200. Because of a crop disease, output in the second period is expected to fall to Y1 = 125. The country wants to smooth consumption as much as possible. The country begins with no external assets or liabilities.

a. [6 pts] Solve for consumption, the current account, and the financial account in t = 0.

b. [8 pts] Solve for the trade balance, the current account, nfia, and the financial account in the second period.

c. [5 pts] Would home be better off or worse off if the interest rate were higher than the initial 2%? Explain your answer.