*Read the question carefully and answer it clearly and in an explanatory way. 1) Consider the two-period small open economy model, which takes the world interest rate, r, as given. Q1-C1-11 =B1* Q2 +rB1* - C2 =-B1* (2) K2 = K[ +11 (3) Where Q is output, C is consumption, I is investment, r is interest rate, K is capital and B* is the net claims of a countries residents on residents in the rest of the world. (i.e. if B* is positive the country is a net creditor) Recall that depreciation is set equal to zero and labour force assumed constant (all that can be chosen is the li.) Assume Bo* = B2* =B1*=0 and draw the transformation curve graphing Qi- I against Q2 Optimal investment will be given by MPK2 = 1+r. and optimal consumption will be given by - (1+p)V'(C1)/V'(C) = -(1+r) Hence illustrate the trade balance on your diagram.. Use the diagram to illustrate how different kinds of shocks will affect the trade balance. Explain. (a) (b) (c) *Read the question carefully and answer it clearly and in an explanatory way. 1) Consider the two-period small open economy model, which takes the world interest rate, r, as given. Q1-C1-11 =B1* Q2 +rB1* - C2 =-B1* (2) K2 = K[ +11 (3) Where Q is output, C is consumption, I is investment, r is interest rate, K is capital and B* is the net claims of a countries residents on residents in the rest of the world. (i.e. if B* is positive the country is a net creditor) Recall that depreciation is set equal to zero and labour force assumed constant (all that can be chosen is the li.) Assume Bo* = B2* =B1*=0 and draw the transformation curve graphing Qi- I against Q2 Optimal investment will be given by MPK2 = 1+r. and optimal consumption will be given by - (1+p)V'(C1)/V'(C) = -(1+r) Hence illustrate the trade balance on your diagram.. Use the diagram to illustrate how different kinds of shocks will affect the trade balance. Explain. (a) (b) (c)