Assume B0=0 and take the budget set derived in Q. 2.a)

a) Assume preferences are given by u(C1,C2)= ln(C1)+0.8ln(C2). Derive the country's optimal consumption stream and savings as well as the net foreign asset position B1.Hint: You can try setting up the constrained maximization problem and solve it by substitution as in the notes or start off from the optimality condition equating marginal costs and benefits of savings.

b) Assume the interest rate increases to 25%. Redo part a).