The parameter {3 is known as the subjective discount factor. It measures the consumer's degree of impatience in the sense that the smaller is (3 , the higher is the weight the consumer assigns to present consumption relative to future consumption. Assume that )3 = 1 f 1.1. The representative household has initial net foreign wealth of (1 +rojB = 1, with m = 0.1, and is endowed with Q1 = 5 units of goods in period 1 and Q2 = 10 units in period 2. The world interest rate paid on assets held from period 1 to period 2, rs, equals 10% (i.e., H = 0.1) and there is free international capital mobility. a) Calculate the equilibrium levels of consumption in period 1, Cl ,consumption in period 2, 02, the trade balance in period 1, TB], and the current account balance in period 1, CA1. {10 marks) Maximizing utility subject to the budget constraint leads to the usual tangency condition: K? M ={l+'r'*) = 1 So, we have 01 =02 Plug that in the budget constraint and get: 01 =02 = 7.9