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

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

whereC1andC2denote 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.

1. a(10 points) 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.
2. b(12 points) Suppose now that in period 1 the relative price of copper continues to be 1, but that theexpectedrelative 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.
3. c(8 points) Finally, continue to assume that in period 1 the relative price of copper is 1 and households are 100 percent sure that the relative price of copper in period 2 is going to be 1.5. However, assume that when period 2 arrives,expectations are not fulfilled, and the relative price remains at 1. What is consumption and the trade balance in periods 1 and 2? Provide intuition. Show all your steps to derive the final results/equations. No credit will be given if only the final results are shown.