International Capital Market. [17 points]

a)(3 points) Explain how international trade in assets can makecountries better off.

b)(4 points) Explain Tobin's idea of Don't put all your eggs in one basket.

c)(10 points) The following simple two-country question illustrates how countries benefit from asset trading. Imagine that there are two countries, Home and Foreign.Assume that the yield on the land is uncertain.Halfthe time, Home's land produces a 200-ton crop of kiwi, while Foreign's land produces a 100-ton crop. The otherhalfof the time, the results are reversed (the foreign harvest is 200 tons, but the Home harvest is only 100).

Suppose the two countries can trade shares in the ownership of their respective harvests (i.e., their assets).Suppose further that with the exchange of shares, a representative Home resident is entitled to receive 75 percent of theHomecrop and 25 percent of the Foreign crop (that is, each year she receives 75 percent of the crop of Home kiwi and 25 percent of the Foreign kiwi crop). Similarly, suppose that a representativeForeignresident owns 75% of theForeigncrop and 25% of the Home crop (that is, each year she receives 75% of Foreign's kiwifruit crop and 25% of Home's crop).

Calculate the value of kiwi fruitthat the Home resident is expecting to receive each year.Now calculate the value of kiwi fruitthat the Foreign resident is expecting to receive each year.If both expected values are the same, explain why this is the case despite the fact that the annual harvest is different in each country in each year. How much kiwis would they receive if they had not exchanged shares in the ownership of their respective crops?

4. Real Shocks and Stabilization. [28 points] Suppose the economy of Canada has reached the long run equilibrium (i.e. full employment) and assume that the functions of exports and imports are as follows: EX = a0 + out] + (12(Y* T*) IMP = [30 m + [320' T)