consider a two-period small open economy populated by households whose preferences are given by

U = ln(C1) + ln(C2) (1)

where C1 and C2 denote consumption of food in periods 1 and 2, respectively. Households are endowed with 1 ton of copper in each period and start period 1 with a ZERO net asset position (B0 = 0). The relative price of copper in terms of food is 1 in both periods, and the world interest rate is zero (r = 0). Use the model of Chapters 3 and 4 to answer this problem.

a ) What is consumption and the trade balance in periods 1 and 2? Show all your steps to derive the final results/equations. No credit will be given if only the final results are shown.

b ) Suppose now that in period 1 the relative price of copper continues to be 1, but that the expected relative price of copper in period 2 increases to 1.5. Calculate consumption and the trade balance in both periods. Show all your steps to derive the final results/equations. No credit will be given if only the final results are shown.