Consider a two-period economy in which money reduces transaction costs, with per-unit costs given by S(V)= bV where V=C/m, = 2 and b = 0.5. Utility is of the form U(C1,C2) = log(C1) + log(C2)/(1+) with = r. The real interest rate is 10%, inflation between periods 1 and 2 is 5% and P1=1. For simplicity, there are no taxes or government expenditures, no investment, and the initial NFA position is zero. Household endowment income is given by Q1 = 5 and Q2 = 5.5. Find the optimal household choices for C1, C2, m1, m2, b1 (i.e. the NFA position), the current account for period 1 and the trade balance for period 1.