Small open endowment economy

by | Jul 27, 2021 | Homework Help

Consider a two-period small open endowment economy populated by a large number of house-holds with preferences described by the lifetime utility functionC1101 C1112 ,where C1 and C2 denote, respectively, consumption in periods 1 and 2.Suppose that households receive exogenous endowments of goods given by Q1 = Q2 = 10 in periods 1 and 2, respectively.Every household enters period 1 with some debt, denoted B?0 , inherited from the past.Let B?0be equal to ?5.The interest rate on these liabilities, denoted r0, is 20 percent.

Finally, suppose that the country enjoys free capital mobility and that the world interest rate on assets held between periods 1 and 2, denoted r?, is 10 percent.(a) Compute the equilibrium levels of consumption, the trade balance, and the current account in periods 1 and 2.

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