10. (3 points) In an open economy, if the long-run budget constraint is upheld (i.e. the country does not default on its debt), in order to keep consumption stable over time a nation will find it desirable to (a) run a trade deficit during negative temporary shocks and run a trade surplus during positive temporary shocks in income. (b) run a trade surplus during negative temporary shocks and run a trade deficit during positive temporary shocks in income. (c) save during temporary negative shocks and borrow during temporary positive income shocks. (d) forego borrowing to maintain financial stability, allowing consumption to fluctuate. (e) set changes in spending equal to changes in income every period. 11. (6 points) Consider a two-period endowment economy model of a small open economy. In the first period (t = 1), households receive an endowment of Q1 = 20 and in the second period (t = 2), they receive an endowment of Q2 = 30. The initial external wealth W0 = 10. Households can save or borrow at the interest rate r = 0.5 (50% interest rate). (a) Suppose that the trade balance in the first period is TB1 = 15. Is the country living beyond its means? (b) What is the maximum trade deficit that this country can have at time 1, TB1, that is sustainable with the intertemporal budget constraint? (c) Assuming that households borrow or lend to smooth consumption over time, setting C = C1 = C2, what is the optimal level of consumption C, and the trade balance at time one, TB1? 5