Problem 6 Consider a two-period small open economy populated by a large number of households with preferences captured by the following lifetime utility function: In (CTON) + In (CZ CN) where Cf and Cf , for t = 1, 2, denote consumption of tradable and nontradable goods in period t, respec- tively. Households are endowed with Q1 = 1 and Q? = 2 units of tradables and Q1 = Q2 = 1 units of nontradables in periods 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero: (a) Calculate the equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1, denoted CA, and p1, respectively. (b) Suppose now that suddenly the world interest rate increases from 0 to 10 percent. Calculate the new equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1