Question 3 Consider a two period small open economy, where the representative con- Sumer has the following utility function log a + Blog c2 Assume also that consumption in each period & (t = 1, 2) is a composite of consumption of the domestic good (cy) and the foreign good (GR) such that C = CHOR Assume that the economy has zero initial assets (ag = 0), and that the real exchange rate in each period is denoted by e. Assume also that income in each period is given by y. The economy can borrow or lend at the international interest rate r. Suppose that #1 = 100, and 72 = 1000. 8 = (1/1.05) and r = 5 percent (0.05). Suppose also that e1 = 62 = 1. (a) Solve for the optimal consumption of home and foreign goods in each period. (b) Calculate the trade balance and the capital account in period 1. (c) What is the trade balance and capital account in period 2