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(5 points) Suppose that a beef-exporting country like Uruguay is initially under a balanced trade (trade balance equals 0). Due to substantial growth of the
(5 points) Suppose that a beef-exporting country like Uruguay is initially under a balanced trade (trade balance equals 0). Due to substantial growth of the Chinese economy, the international price of beef rises unexpectedly. In response to this unexpected shock, the trade balance deteriorates (trade balance becomes negative) in the first period. Consider the small open economy model with with optimizing agents that like to smooth consumption over time. (a) If the increase in the price of beef lasts one period only, does the model explain why the trade balance deteroriated? (b) What assumptions about the expected path of the international price of beef can explain the decline in the trade balance?In question 12 part b, "expected path of the international price of beef" means "expected FUTURE path of the international price of beef
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