Consider a two-period, small open economy with endowments on tradable and nontradable goods. The representative household has lifetime utility U(CT1CN1, Cr2CN2) = log C₁₁ +log C1 + Blog Cr2+ Blog CN2 N1 Endowments are 21 22=5 and Qr₁=2.5, Qr2 = 7.5. interest rate is r* = 0.04 and the discount factor is 3=1/1.04 = 0.9615. = Initial NFA is zero. The world a. Compute equilibrium consumption of both goods, the trade balance, and the real exchange rate in both periods. b. Suppose that after the household chooses how much to borrow/save in period 0, the world interest rate rises to r=0.10. Recompute the equilibrium variables for period 2, and compute the difference between lifetime utility between this scenario and the scenario in part 1.

Consider a two-period, small open economy with endowments on tradable and nontradable goods. The representative household has lifetime utility U(CT1CN1, Cr2CN2) = log C₁₁ +log C1 + Blog Cr2+ Blog CN2 N1 Endowments are 21 22=5 and Qr₁=2.5, Qr2 = 7.5. interest rate is r* = 0.04 and the discount factor is 3=1/1.04 = 0.9615. = Initial NFA is zero. The world a. Compute equilibrium consumption of both goods, the trade balance, and the real exchange rate in both periods. b. Suppose that after the household chooses how much to borrow/save in period 0, the world interest rate rises to r=0.10. Recompute the equilibrium variables for period 2, and compute the difference between lifetime utility between this scenario and the scenario in part 1.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter27: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 13CQ

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