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Suppose that in period 1 a small open economy initially has a trade surplus and the government initially has a budget deficit. (A.) Can you
Suppose that in period 1 a small open economy initially has a trade surplus and the government initially has a budget deficit. (A.) Can you determine if the household is saving or dissaving? If so, is the household saving or dissaving? If not, explain why you cannot determine this without more information. (B.) Suppose now there is a shock that causes the household to save less if it was a saver or to dissave more if it was a dis-saver before the shock (either way, savings falls). Can you determine the qualitative effect of this shock on household utility? If so, what is the qualitative effect of this shock on household utility? If not, explain why you cannot determine this without more information
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