Consider a two-period small open endowment economy populated by a large number of house-holds with preferences described by the lifetime utility

Consider a two-period small open endowment economy populated by a large number of house-holds with preferences described by the lifetime utility function

C

110

1 C

111

2 ,

where C1 and C2 denote, respectively, consumption in periods 1 and 2.Suppose that householdsreceive 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∗

0

be equal to −5.The interest rate on these liabilities, denoted r0, is 20 percent.Finally, supposethat the country enjoys free capital mobility and that the world interest rate on assets heldbetween periods 1 and 2, denoted r∗, is 10 percent.

(a) Compute the equilibrium levels of consumption, the trade balance, and the currentaccount in periods 1 and 2.

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