Question: Please help me with question 1 and 2. Thanks!! Exercise 9.2 (A Sudden Stop, I) Consider a two-period small open econ- omy populated by a
Please help me with question 1 and 2. Thanks!!

Exercise 9.2 (A Sudden Stop, I) Consider a two-period small open econ- omy populated by a large number of households with preferences captured by the following lifetime utility function In(CFCN ) + In(CF CN), where Of and Of, fort = 1, 2, denote consumption of tradable and nontrad- able goods in period t, respectively. Households are endowed with Q1 = 1 and Q% = 2 units of tradables and Of = Q, = 1 units of nontradables in periods 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero. 1. Calculate the equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1, denoted CA1 and p1, respectively. 2. Suppose now that suddenly the world interest rate increases from 0 to 10 percent. Calculate the new equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
