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Consider a two-period, small open economy with endowments on tradable and nontradable goods. The representative household has lifetime utility U(C,Cy,Cr2,Cv2)= log C, + log C + b log C, + b log Cy2 Endowments are Qv = Qv2 = 5 and Q, = 2.5, Q,2 = 7.5. Initial NFA is zero. The world interest rate is r' = 0.04 and the discount factor is b = 1/1.04= 0.9615. a. Compute equilibrium consumption of both goods, the trade balance, and the real exchange rate in both periods.

Consider a two-period, small open economy with endowments on tradable and nontradable goods. The representative household has lifetime utility U(C,Cy,Cr2,Cv2)= log C, + log C + b log C, + b log Cy2 Endowments are Qv = Qv2 = 5 and Q, = 2.5, Q,2 = 7.5. Initial NFA is zero. The world interest rate is r' = 0.04 and the discount factor is b = 1/1.04= 0.9615. a. Compute equilibrium consumption of both goods, the trade balance, and the real exchange rate in both periods.

Advanced Engineering Mathematics
Advanced Engineering Mathematics
10th Edition
ISBN:9780470458365
Author:Erwin Kreyszig
Publisher:Erwin Kreyszig
Chapter2: Second-order Linear Odes
Section: Chapter Questions
Problem 1RQ
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Consider a two-period, small open economy with endowments on tradable and nontradable goods. The representative household has lifetime utility U(C,Cy,Cr2, Cy2)= log C, + log Cy + b log C, + b log Cya Endowments are Qy = Qv2 = 5 and Q, = 2.5, Q = 7.5. Initial NFA is zero. The world %3D %3D interest rate is r' = 0.04 and the discount factor is b = 1/1.04= 0.9615. 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.
Transcribed Image Text:Consider a two-period, small open economy with endowments on tradable and nontradable goods. The representative household has lifetime utility U(C,Cy,Cr2, Cy2)= log C, + log Cy + b log C, + b log Cya Endowments are Qy = Qv2 = 5 and Q, = 2.5, Q = 7.5. Initial NFA is zero. The world %3D %3D interest rate is r' = 0.04 and the discount factor is b = 1/1.04= 0.9615. 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.
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