Section 2. Answer True or False. Explain your answer in detail. No credit without explanation.

Explain if the following statement is true or false: "In the two-period small open model with production reviewed in class, a decrease in the productivity of period 1 (A₁) (i) lowers consumption in period 1 (C₁); (ii) increases national saving in period 1 (S₁); (iii) lower investment in period 1 (I₁); and (iv) improves the current account in period 1 (CA₁)."

Use as many equations as you can to support your answer. Do not forget to include your step-by-step calculations/derivations and formulas to get full credits and to explain in detail the intuition behind your results. Finally, include a diagram of the saving, investment and current account schedules and explain if any of them shift with the decrease in A₁. The statement is true only if the four sub-statements are true.