There are 2 questions and each question is worth 12.5 points. The full score of this problem set is 25 points. Please type up your answers in this LATEX document and submit everything in a compressed file. Q1. Consider a two-period small open economy populated by a large number of households with preferences described by the lifetime utility function ln(C T 1 C N 1 ) + ln(C T 2 C N 2 ) where C T t and C N t , for t = 1, 2, denote consumption of tradable and nontradable goods in period t, respectively. Households are endowed with QT 1 = 1 and QT 2 = 2 units of tradables and QN 1 = QN 2 = 1 units of nontradables in periods 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero. 1. Calculate the equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1, denoted CA1 and p1, respectively. 2. Suppose now that suddenly the world interest rate increases from 0 to 10 percent. Calculate the new equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1.