Consider an economy that optimally decides to perfectly smooth consumption in a two-period model. Allocations are such that C1 < Q1 . Explain the movements in C1 , C2 , B1 and the trade balance (TB1) after the following shocks:

a) A sudden decrease in Q1 after a natural disaster.

b) An expected decrease in Q2 such that in present value the change is of the same magnitude as in a).