Question: Please explain if the following statement is true or false: In the two-country period model reviewed in class, the response of the Current Account to

Please explain if the following statement is true or false:

In the two-country period model reviewed in class, the response of the Current Account to a temporary but positive Terms of Trade shock is SMALLER than its response to a permanent but positive Terms of Trade shock. Use equations to support your answer.

For simplicity assume a logarithmic utility function

U=ln(C_1) + ln(C_2).

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