QUESTION 1. FINANCIAL CRISES AND THE CURRENT ACCOUNT (30 MARKS) Consider a two-period model of a small open economy with a single good each period. Let preferences of the representative household be described by the utility function U (C,C) = ln C + In C, where C and C denote consumption in periods 1 and 2, respectively. In period 1, the household receives an endowment of Q = 10. In period 2, the household receives profits, denoted by II, from the firms it owns. In period 1, households and firms have access to financial markets where they can borrow or lend at the interest rate r. Firms borrow in period 1 to invest in physical capital. They are subject to a collateral constraint of the form DK, where D denotes the amount of debt issued by the firm in period 1 and K denotes the value of the firm's collateral. Suppose that equals 3. In turn, firms use the physical capital purchased in period 1 to produce final goods in period 2. The production technology in period 2 is given by Q2 = 2.4 x ln (1), where Q2 and I denote, respectively, output in period 2 and investment in period 1. Assume that there exists free international capital mobility and that the world interest rate, r*, is 20% per period. Finally, assume that the economy's initial net foreign asset position is zero (B = 0). Based on the above information, answer the following questions. (1) [15 marks] Solve for the equilibrium levels of the current account balance in periods 1 and 2 (CA and C'A). (2) [15 marks] Now consider an investment surge. Specifically, assume that as a result of a technological improvement, the production technology becomes Q = 4.8 x In (I). Solve for the equilibrium levels of the current account balance in periods 1 and 2 (CA and CA), assuming the other conditions remain unchanged