Question
Please explain if the following statement is true or false: In the two-period model reviewed in class, both the Current Account and the Trade Balance
Please explain if the following statement is true or false: "In the two-period model reviewed in class, both the Current Account and the Trade Balance in period 1 worsen (i.e., decrease) with an anticipated increase in the endowment of period two (Q1=0 and Q2>0)''
Use equations of the optimal allocation of consumption in periods 1 and 2, the trade balance in period 1 and the current account in period 1 to support your answer. No credit without explanation. For simplicity, assume the following lifetime utility function:
U(C1,C2)= ln(C1) + ln(C2)
Note that the subjective discounting factor is 0<<1, which is different from the case reviewed in the textbook.
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