Use the model of Chapter 5 to answer this problem. Suppose in period 1, unexpectedly the initial interest rate decreases from r0 to r0 (so, r0 > r0 > 0). Present a graphical analysis of the effects of this change in initial conditions on consumption, saving, investment, the trade balance, and the current account in period 1. Distinguish the case in which the country is initially a net creditor of the rest of the world (B0 > 0) from the case in which the country is initially a net debtor (B0

Figure: MPK of Q2 = VT Figure 5.1: The production function and the marginal product of capital (a) Q2 = A2F(11) slope A2F'(11) A,FI*) Il ( (b) MPKA slope A2F"(11) A2F'(IT) MPK = A2F'(11) IT T MPKAI + slope = A2F"(11) A2F'(11) MPK = A2F (11) li 1 Figure: MPK of Q2 = VT Figure 5.1: The production function and the marginal product of capital (a) Q2 = A2F(11) slope A2F'(11) A,FI*) Il ( (b) MPKA slope A2F"(11) A2F'(IT) MPK = A2F'(11) IT T MPKAI + slope = A2F"(11) A2F'(11) MPK = A2F (11) li 1