1. What are the exogenous factors that could explain the Canadian current account deficit, i.e. CA1 < 0? 2. Consider a two-period model of a small open economy with a single good each period and no investment. Let preferences of the representative household be described by the utility function U(C_1,C_2)= (C_1)^2 + (C_2)^2 The parameter is known as the subjective discount factor. It measures the consumer's degree of impatience in the sense that the smaller is Beta , the higher is the weight the consumer assigns to present consumption relative to future consumption. Assume that Beta= 1/1.1. The representative household has initial net foreign wealth of (1 + r0)B_0 = 1, with r_0= 0.1, and is endowed with Q_1= 5 units of goods in period 1 and Q_2 = 10 units in period 2. The world interest rate paid on assets held from period 1 to period 2, r, equals 10% (i.e., r = 0.1) and there is free international capital mobility. (a) Calculate the equilibrium levels of C_1, C_2,TB_1,CA_1. (10 marks) (b) Suppose now that the government imposes capital controls that require that the country's net foreign asset position at the end of period 1 be non-negative (B1 0). Compute the equilibrium value of the domestic interest rate r_1, C_1, C_2, T B_1, CA_1. (10 marks) (c) Evaluate the effect of capital controls on welfare. Specifically, find the level of utility under capital controls and compare it to the level of utility obtained under free capital mobility. (10 marks)