Q3. Consider a two-period small open economy populated by households whose preferences are given by U (C1. (2) = In Q1 + In C2 where C and C denote consumption of food in periods I and 2. Households are endowed with 1 ton of copper in each period and start period 1 with zero net asset position. The relative price of copper in terms of food is 1 in both periods, and the world interest rate is zero. a. What is consumption and trade balance in periods 1 and 2? b. Suppose now that in period I the relative price of copper continues to be 1, but that the expected relative price of copper in period 2 increases to 1.5. Calculate consumption and trade balance in both periods

Answer rating: 100% (QA)

The Answer is in the image, click to view ... View the full answer