Question: Assume a two-period small open economy model where national income is 150 in the current period and 140 in the future period. The world real interest rate is assumed to be 4% per period. The representative consumer always wishes to set current consumption plus government spending equal to future consumption plus government

spending, (C+G=C+G), which implies perfect complements preferences.

1. Determine equilibrium consumption plus government spending in the current and future periods, and also the current account surplus. Draw a large diagram to illustrate your results. Put in the actual number for the X and Y axis intercepts of the national intertemporal budget constraint.

2. Now, suppose that the world real interest rate decreases to 2% per period. Again, determine consumption plus government spending in the current and future periods and also the current account surplus, and show these in the same diagram. Put in the actual number for the X and Y axis intercepts of the national intertemporal budget constraint.