Reference no: EM131189

Part -1

1. Write down the household's budget constraints for period 1 and 2 and identify the current account.

2. Derive the household's lifetime/intertemporal budget constraint and in-terpret the result.

3. Derive the household's optimality condition for consumption (the Euler equation) and interpret the result.

4. Assume that u(C) = log(C). Compute the current account for period 1. Interpret the result in view of the household's income path.

5. Use the result of (d) to compute the optimal values for consumption in period 1 and 2. Which condition has to be satisfied to guarantee an equal amount of consumption?

6. Show graphically the household's benefits from intertemporal trade.

Part - 2

1. Write down the household's budget constraints for period 1 and 2 and identify the current account.

2. Derive the household's lifetime budget constraint.

3. Derive the household's optimality conditions and interrupt the results.

4. Assume that u(C) = log(C). Compute the current account for period 1. Explain how the likelihood of a current account deficit in period 1 is related to the level of technology in period 2.

5. Show graphically the household's benefits from optimality integration. Differentiate between the benefits from the intemporal trade and efficient investment.