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,kindly solve the following Consider a twoperiod model of a small open economy with a single good each period and no investment. Let preferences ofthe

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,kindly solve the following

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Consider a twoperiod model of a small open economy with a single good each period and no investment. Let preferences ofthe representative household be described by the utility function urc1,c21 = {C1 + pic: The parameter IE is known as the subjective discourrt factor. It measures the consumer's degree of impatience in the sense that the smaller ,3 is, the higher is the weight the consumer assigns to present consumption relative to future consumption. Assume that ,8 = 1!].1. The representative household has initial net foreign wealth of {1 + r0} EN] = 1, with r = :11, and is endowed with 01 = 5 units of goods in period 1 and 02 = ID units in period lThe world irrterest rate paid on assets held from period lto period 2, r*, equals 10% {r* = :11] and there is free international capital mobility. 1. Calculate the equilibrium levels of C1, C2, 1131, CA1. 2. Suppose now that the government imposes capital corrtrols that require that the country's net foreign asset position at the end of period 1 be nonnegative [Fl 2 ID]. Compute the equilibrium value of the domestic interest rate r1, C1, C2,TB]_, CA1. 3. Evaluate the effect of capital corrtrols on welfare. Specically, nd the level of utility under capital controls and compare it to the level of utility obtained under free capital mobility. :Capital controls] Consider a two-period model of a small open economy-with a single good- each period and no investment. Let preferences of the representative household he described by the utilitv function: UIIchcg} = vii-3+ v where 3 denotes the subjective discount factor. Assume that :3: . The representative house hold has initial net foreign wealth of {l + rulBg = 1. wither: = Ill. and is entimi'ed with tn = 5 units of goods in period 1 and if; 2 it] units in period 2-. The vvorid interest rate paid on assets held from period He period 2. 1*, equals \"1% {i.e.. vs: 11.1} and there is-iree international capital mobility. Calculate the equilibrium levels of consumption in period 1. c1. consumption in period is.- ca. the trade balance in period lr to\" and the current account balance in period 1. ml. Suppose that the government imposes capital controls that require that the country's net i'oreign asset position at the mid of period 1 he u'onnegative {BI 33: [l]. IClonipute again 15.1, ca. 151 amt! m1 and evaluate the effect of capital cndtrols on welfare. Provide a brief economic interpretation [f your results. Hinder 1e'rhat circumstances would the capital controls not be binding? Expiin'without using any.r derivations

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