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2. (Worth 25 points total.) Consider a small open economy that lives for two periods, only, (0 and 1) and is inhabited by a continuum

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2. (Worth 25 points total.) Consider a small open economy that lives for two periods, only, (0 and 1) and is inhabited by a continuum of identical individuals grouped into an aggregate risk-sharing household. Each period aggregate output Y4 is produced via the function Yt = Z+L+ where Z is exogenous productivity and Lt is labor. There is no uncertainty about the level of productivity in any one period. If output is not consumed or loaned out in any one period, then it spoils and cannot be carried over to the following period. This is a small open economy, so it can borrow and lend freely at the constant-across-periods international interest rate r. The household's lifetime utility is given by U = - otot Lt' t=0 where: B (0,1) is the household's (constant) subjective discount factor (i.e., 0

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