Assume that households are risk neutral in period 2 rather than risk-averse.

ln(C₁) + E(C2) where C₁ and C₂ are the consumption in periods 1 and 2, respectively. Note that the second period utility does not have any logarithmthe preferences are logarithmic in period-1 but linear in period-2 consumption. Assumed that the households can borrow or lend at the foreign interest rate r*. Furthermore, consider a situation in which Q₁=Q, but Q₂ is unknown in period 1.

Q2 = { Q + with p=0.5 and Q with (1p) = 0.5

Finally, assume B*₀=0.

1a. Compute the expected value and the standard deviation of Q₂ (the endowment in period 2).

b. Assume that =0. Find the equilibrium values of C₁ and B*₁.

c. Now assume that >0. Find the equilibrium value of B1. What is the predicted effect of the precautionary savings on the current account? Explain.