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(A Boom-Bust Cycle I) This exercise analyzes a boom-bust cycle through a numerical example. Consider the TNT-DNWR economy. Suppose that the endowment of tradable goods
(A Boom-Bust Cycle I) This exercise analyzes a boom-bust cycle through a numerical example. Consider the TNT-DNWR economy. Suppose that the endowment of tradable goods is 1 in both periods, QT 1 = QT 2 = 1, that the world interest rate is 10 percent (r = 0.1), that the time endowment is 1, h = 1, that the initial net asset position is 0, B0 = 0, and that the initial nominal wage is 0.75, W0 = 0.75. The utility function is ln C1 ln C2. Assume further that the subjective discount factor is 0.8. Consumption is a composite good made of tradable and nontradable goods, via the Cobb-Douglas aggregator Ct = (CT t ) (CN t )1 , with = 0.5. Assume that the production technology for nontraded goods is F (ht) = h t , with = 0.75. The central bank pegs the nominal exchange rate at Et = 1, for t = 1, 2. 1. Find the equilibrium values of the current account, the relative price of nontradables, the nominal wage, and the unemployment rate in periods 1 and 2. 2. Discuss whether the economy experiences a boom-bust cycle (i.e., a boom
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