Exercise 3.2 (Endowment Shock) Consider a two-life household whose lifetime utility function describes its consumption preferences as follows: . ._L -CJ:L ' C1 C1 and 02 represent the consumption of phases 1 and 2, respectively. 01. Does such preference give an indifference curve that slopes downward and is convex toward the origin? Please state 02. Assume that the family's wealth at the beginning of period 1 isr') 9o where B, Is the inherited bond, r. is the interest rate on the asset held in periods 0 through 1. In addition, households receive commodity endowments Q1 and 02 in periods 1 and 2, respectively. In phase 1, households can borrow through bonds with an interest rate of r; , denoted by B; . Ask for the optimal level of consumption for periods 1 and 2, expressed as a function of household lifetime wealth 5(l+r,)&+0,+?_9 and interest rate '1. {'f-L 3. Find the response of consumption, trade balance and current account in the first period to the shocks of temporary endowment growth 50.70 and anF-O ) bCI , ATE. J bC-l'r . 4. find the response of consumption, trade balance and curren account in the first period to the permanent endowment growth shock 13 Q, : 1301 70 an Act 1 15-181 A CAR J