Consider the two-period small open economy presented in class. Lifetimeutility is given by U = log(C1) + β log(C2). The endowment each period is Y1 = 10and Y2 = 35; agents start period 1 with zero net foreign wealth, B1 = 0. The interestrate in global capital markets is 50 percent, r = 0.5. Finally, assume that β(1 +r) = 1. a. Write the two period-by-period budget constraints and the intertemporal budget constraint(define any new variables that you use). b. Solve for consumption in each period. (Note: Recall that ∂log(C)∂C =1C). c. What is the current account in the first period? Does the agent borrow or lend ininternational markets in the first period? If so, how much? d. Explain the relationship between international borrowing and lending and intertemporal trade (in terms of present and future consumption). (i need help with number 7 )
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