Problem 8 Suppose you have an economy as described by the TNT-DW model with an endowment of tradable goods 27 = Q7 = 1. The time endowment is 1 and thus h = 1, and the initial net foreign asset position is Bo = 0. Further assume that the world interest rate y* = 0.25, and that the initial nominal wage is Wo = 0.75. The household's subjective discount factor is B = 0.8, while the expenditure share of tradable consumption (the parameter on the Cobb-Douglas consumption aggregator) is y = 0.5. Finally, assume that the labor share in the nontradable goods sector is a = 0.75 with technology given by: F (ht) = he Suppose that initially the economy is in an equilibrium in which the nominal exchange rate is equal to 1 in both period $1 = $2 = 1. Answer the following: (a) Set up the household's optimization problem. (b) Compute the equilibrium levels of tradable consumption for periods 1 and 2. Provide some intuition for your results. (c) Compute the CA for both periods. (d) Assuming that the economy is at full employment in both periods (i.e.: h1 = h2 = h), compute the equilibrium nominal wage in each period. Assume now that world interest rises doubles (* = 0.5) and that the government intends to keep the nominal exchange rate fixed (61 = 62 = ). Answer the following: (e) Compute the equilibrium values for consumption of tradable goods in each period. (f) Compute the Trade Balance and Current Account in each period. (g) Knowing the nominal wage is fixed at Wo, solve for the employment level in period 1, h1. What do you expect will happen to the equilibrium employment level in the second period (an intuition is sufficient for period 2)? (h) What happens to the relative price of nontradables in period 1 (p1)? Provide some intuition for your results. (i) Based on your prior results, what happens to the real exchange rate in the first and second periods. Explain your