QuasTioN 3. SMALL OPEN Economv WITH FUTURE [inseam (30 MARKS) Consider a two-period model of a small open economy with a single good each period. Let preferences of the representative household he described by the utility function U(CI1C2) =lnC'1 + 11102, where Cl and C2 denote consumption in periods 1 and 2, respectively. The parameter ,8 is called as the household's discount factor {this parameter determines how much the household values consumption in the future relative to today's consumption). Suppose that households receive exogenous endowments of goods given by Q1 = Q2 = 20 in period 1 and 2, respectively. Every household enters period 1 with some debt, denoted BE, inherited from the past. Let B; he equal to -5. The interest rate on these liabilities, denoted n], is 0.09. Finally, suppose that the country enjoys free capital mobility and that the world interest rate on assets held between periods 1 and 2, denoted r', is 0.14. {1) [1!) marks] Assume ,8 = [1.8, and solve for the current account balances in periods 1 and 2 {CA1 and CA2}. {Hint: the derivative of the utility function with respect to (:2 becomes U2 (01,02) = W = W = 5%) {:2} [2!) marks] Consider the same situation as in Question 3 Part 1. Now assume that the household's discount factor was hit by a shock and reduced to 35' = 0.5. Find the current account balances in periods 1 and 2 {CA1 and CA2} in this new situation. Briey explain the effect of changes in the household's discount factor on the current account balance