Question: Exercise 3.4 (An Anticipated Output Shock II) Consider atwoperiod small open endowment economy. The lifetime utility functions of households takes the form, 011/503/5. In period

Exercise 3.4 (An Anticipated Output Shock II) Consider atwoperiod small open

endowment economy. The lifetime utility functions of households takes the form, 011/503/5.

Exercise 3.4 (An Anticipated Output Shock II) Consider atwoperiod small open endowment economy. The lifetime utility functions of households takes the form, 011/503/5. In period 1 households receive an endowment of Q1 and in period 2 they receive Q2. Assume that the world interest rate is 33.3% ('r* = 1/3) and that the initial net foreign asset position is zero (BS = 0). Find the change in the current account in periods 1 and 2 in response to news in period 1 that the period2 endowment will increase by AQg. Provide an intuitive explanation for your ndings

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