The Current Account in a 2-period Model Fictional country Gondal² is choosing to borrow and lend with the rest of the world. It is small, so its actions have no effect on the world interest rate, which is r = 0.21 between period 1 and 2. In two years, Gondal plans to cut off contact with the rest of the world, and so all debts have to be repaid in period 2. Gondal has utility +B: 1 where = 2 and 3 = 0.81. The growth rate of GDP in Gondal is 10 percent, i.e. /2 = 1.1. Denote the current account of Gondal in each period by ₁ and 22. 1. What is Gondal's budget constraint?

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3 The Current Account in a 2-period Model
Fictional country Gondal² is choosing to borrow and lend with the rest of the world. It is
small, so its actions have no effect on the world interest rate, which is r = 0.21 between
period 1 and 2. In two years, Gondal plans to cut off contact with the rest of the world, and
so all debts have to be repaid in period 2.
Gondal has utility
U=
1
+B.
1
where = 2 and 3 = 0.81.
The growth rate of GDP in Gondal is 10 percent, i.e. y₂ = 1.1. Denote the current
account of Gondal in each period by 2₁ and 22.
1. What is Gondal's budget constraint?
Transcribed Image Text:3 The Current Account in a 2-period Model Fictional country Gondal² is choosing to borrow and lend with the rest of the world. It is small, so its actions have no effect on the world interest rate, which is r = 0.21 between period 1 and 2. In two years, Gondal plans to cut off contact with the rest of the world, and so all debts have to be repaid in period 2. Gondal has utility U= 1 +B. 1 where = 2 and 3 = 0.81. The growth rate of GDP in Gondal is 10 percent, i.e. y₂ = 1.1. Denote the current account of Gondal in each period by 2₁ and 22. 1. What is Gondal's budget constraint?
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