A small open, twoperiod economy has preferences given by U(Cl)+U(Cg), and agents receive income Y1 and Y2 in each period, then pay taxes T1 and T2 to the government. The government uses the taxes to spend on 01 and G2 in periods 1 and 2 respectively. The economy is open to international capital markets with the exogenous world interest rate r and assume 3(1 + r) : 1. The government and the private sector can borrow or lend at rate 7", but the private sector is limited in its borrowing it cannot borrow more than a xed exogenous amount B. a) First, assume that the borrowing limit is not binding. Derive the impact of a government decit in the rst period that is caused by a reduction in T1. What is the effect on government debt? What is the impact on the private sector total asset holdings? What is the effect on the economy's net foreign assets? b) Now assume that the constraint on borrowing may bind. Derive the maximum value of T1 such that the constraint does not bind. Assuming that T1 is above this maximum value so the constraint does bind, derive the impact of a fall in T1 (a rise in the government budget decit) on private sector asset holdings and the economy's net foreign assets. Is the government decit reected in a current account decit