Consider a two-period economy that has at the beginning of period 1 a net foreign asset position of -100. In period 1, the country runs a current account deficit of 5 percent of GDP, and GDP in both periods is 120. Assume the interest rate in periods 1 and 2 is 10 percent.

1. Find the trade balance in period 1 (T B1), the current account balance in period 1 (CA1), and the country's net foreign asset position at the beginning of period 2 (B 1 ).

2. Is the country living beyond its means? To answer this question find the country's current account balance in period 2 and the associated trade balance in period 2. Is this value for the trade balance feasible? [Hint: Keep in mind that the trade balance cannot exceed GDP.]

3. Now assume that in period 1, the country runs instead a much larger current account deficit of 10 percent of GDP. Find the country's net foreign asset position at the end of period 1, B 1 . Is the country living beyond its means? If so, show why.