Q2. (2) Consider the two-period small open economy model, which takes the world interest rate, r, as given. 91-C1-11 =B1* Q2 +rB/* - C2 = -B1* K2=K] +11 Where Q is output, C is consumption, I is investment, r is interest rate, K is capital and B* is the net claims of a countries residents on residents in the rest of the world. (i.e. if B* is positive the country is a net creditor) Recall that depreciation is set equal to zero and labour force assumed constant (all that can be chosen is the 11.) Assume Bo* = B2* =B1*=0 and draw the transformation curve graphing Q1- 11 against Q2. Optimal investment will be given by MPK2 = 1+r. and optimal consumption will be given by - (1+p)V'(C1)/V'(C2) = -(1+r) Hence illustrate the trade balance on your diagram.. Use the diagram to illustrate how different kinds of shocks will affect the trade balance. Explain. [%20] (a) (b) (c) Q2. (2) Consider the two-period small open economy model, which takes the world interest rate, r, as given. 91-C1-11 =B1* Q2 +rB/* - C2 = -B1* K2=K] +11 Where Q is output, C is consumption, I is investment, r is interest rate, K is capital and B* is the net claims of a countries residents on residents in the rest of the world. (i.e. if B* is positive the country is a net creditor) Recall that depreciation is set equal to zero and labour force assumed constant (all that can be chosen is the 11.) Assume Bo* = B2* =B1*=0 and draw the transformation curve graphing Q1- 11 against Q2. Optimal investment will be given by MPK2 = 1+r. and optimal consumption will be given by - (1+p)V'(C1)/V'(C2) = -(1+r) Hence illustrate the trade balance on your diagram.. Use the diagram to illustrate how different kinds of shocks will affect the trade balance. Explain. [%20] (a) (b) (c)