Question 6

Consider a two period small open economy without production and a representative household, which lives for two periods. It receives endowments in the first period (Q1) and second period (Q2), respectively. The household inherits no wealth and optimally decides how much to consume in the first period (C1) and second period (C2) as well as international bonding (B1) in the first period, which pays the interest rate R. Household preferences are given by U(C1;C2) = log(C1) + log(C2). Suppose there is a temporary increase in first period endowment Q1 by Delta, while period 2 endowment stays the same at Q2. How will the Trade Balance in period 2 (TB2) change?

a. Impossible to tell from the provided information

b. TB2 will be roughly unaffected

c. TB2 will decrease

d. TB2 will increase

Question 7.

Consider a two-period small open economy with two sectors; tradable and nontradable goods. The representative household lives for 2 periods and receives endowment of both goods. Assume the household's consumption is a composite of tradable and non-tradable goods described by Cobb-Douglas aggregation technologies as in Topic 3. Suppose that the endowment of tradables is decreased in the first period. Then:

a. The relative price of non-tradables to tradables increases and the real exchange rate depreciates.

b.The relative price of non-tradables to tradables increases and the real exchange rate appreciates

c.The relative price of non-tradables to tradables decreases and the real exchange rate depreciates

d. Impossible to tell from the provided information

eThe relative price of non-tradables to tradables decreases and the real exchange rate appreciates