Exercise 13.1 (Sudden Stops With Downward Wage Rigidity) Consider a two-period, small, open economy. Households are endowed with 10 units of tradables in period 1 and 13 units in period 2 (Q{ = 10 and Q? = 13). The country interest rate is 10 percent, or r = 0.1, the nominal exchange rate is fixed and equal to 1 in both periods (E1 = E2 = 1), and the nominal wage equals 8.25 in both periods (W1 = W2 = 8.25). Nominal wages are downwardly rigid. Suppose the economy starts period 1 with no assets or debts carried over from the past (B; = 0). Suppose that the household's preferences are defined over consumption of tradable and nontradable goods in periods 1 and 2, and are described by the following utility function, In CT + In ON + In C2 + In CN, where CT and C, denote, respectively, consumption of tradables and non- tradables in period i = 1, 2. Let p1 and p2 denote the relative prices of nontradables in terms of tradables in periods 1 and 2, respectively. House- holds supply inelastically h = 1 units of labor to the market each period. Finally, firms produce nontradable goods using labor as the sole input. The production technology is given by Q1 = hi and Q2 = h, in periods 1 and 2, respectively, where Qu and hi denote, respectively, nontradable output and hours employed in period i = 1, 2. The parameter o is equal to 0.75. 1. Compute the equilibrium levels of consumption of tradables and the trade balance in periods 1 and 2.2. Compute the equilibrium levels of employment and nontradable output in period 1. 3. Suppose now that the country interest rate increases to 32 percent. Calculate the equilibrium levels of consumption of tradables, the trade balance, consumption of nontradables, and the level of unemployment, all for period 1. Provide intuition. 4. Given the situation in the previous question, calculate the minimum devaluation rate consistent with full employment. Explain