Home » Suppose that the real interest rate is constant over time and equal to 10%. Consider a two-period economy where coconuts are the only good.

# Suppose that the real interest rate is constant over time and equal to 10%. Consider a two-period economy where coconuts are the only good.

Suppose that the real interest rate is constant over time and equal to 10%. Consider a two-period economy where coconuts are the only good. Further assume that the economy is endowed with 90 coconuts in period 1, and 121 coconuts in period 2.

1. Draw and label (on the same diagram) three intertemporal budget lines: one under the assumption that the economy begins with a net international investment position Bo*=0; another where the initial net international investment position is Bo*=-10; and one where the initial net international investment position is Bo*=10. Hint: the effect of a change in the initial international investment position is similar to the effect of a change in the first period endowment.

2. Based on the three intertemporal budget lines drawn for question 1, show that a utility-maximizing economy must have a trade surplus in at least one of the two periods when Bo*≤0, but could have trade deficits in both periods if Bo*>0. Hint: you need to draw the three budget lines along with possible indifference curves. It will be best if you draw three separate diagrams (one for each Bo*< 0, Bo*=0,and Bo*>0).

3. Suppose that Bo*= 0 and that U(C1,C2) = ln(C1) + ln(C2). Calculate the trade balance and current account for each period.

4. Suppose that disease strikes the economy. There is no effect on the current (period 1) harvest of coconuts, but households correctly anticipate that they will only be able to harvest 80 coconuts in the second period. Again assuming that Bo*= 0 and that U(C1,C2) = ln(C1) + ln(C2), how will this affect their trade balance and current account in each period? Calculate their numeric values and draw an appropriate diagram to illustrate this shock.

5. Rather than the disease in the previous question, suppose that scientists find a way to increase the number of coconuts by 10% in each period (so 99 coconuts in the first period, and 132 coconuts in the second period). Again assuming that Bo*= 0 and that U(C1,C2) = ln(C1) + ln(C2), how will this affect their trade balance and current account in each period? Calculate their numeric values and draw an appropriate diagram to illustrate this shock.

## Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
\$26
The price is based on these factors:
Number of pages
Urgency
Basic features
• Free title page and bibliography
• Unlimited revisions
• Plagiarism-free guarantee
• Money-back guarantee
On-demand options
• Writer’s samples
• Part-by-part delivery
• Overnight delivery
• Copies of used sources
Paper format
• 275 words per page
• 12 pt Arial/Times New Roman
• Double line spacing
• Any citation style (APA, MLA, Chicago/Turabian, Harvard)

# Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

### Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

### Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

### Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.