5. Consider a two-period, small open economy populated by a large number of households with preferences captured by the following life-time utility function, C/² + BC1/2 where C₁=(CT) (CN)¹-1 C₂=(C)(CN)¹- with (0,1). Households are endowed with Q=1 and Q = 2 units of tradables and Q Q = 1 unit of nontradables in period 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero. Derive the equilibrium relative price of nontradables in terms of tradables in period 1. What is the effect of an increase in period 2 nontradable endowment, Q, on the period 1 relative price of nontradables, p₁? What is the effect on the real exchange rate?

5. Consider a two-period, small open economy populated by a large number of households with preferences captured by the following life-time utility function, C/² + BC1/2 where C₁=(CT) (CN)¹-1 C₂=(C)(CN)¹- with (0,1). Households are endowed with Q=1 and Q = 2 units of tradables and Q Q = 1 unit of nontradables in period 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero. Derive the equilibrium relative price of nontradables in terms of tradables in period 1. What is the effect of an increase in period 2 nontradable endowment, Q, on the period 1 relative price of nontradables, p₁? What is the effect on the real exchange rate?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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