Choose the one alternative that best completes the statement or answers the question and EXPLAIN your reasoning. Do not forget to include equations, graphs, or any other material you believe is needed to understand your choice. To answer this problem assume a two-period economy with the foll
Section 1. Multiple Choice WITH Explanation.
Choose the one alternative that best completes the statement or answers the question and EXPLAIN your reasoning. Do not forget to include equations, graphs, or any other material you believe is needed to understand your choice.
To answer this problem assume a two-period economy with the following logarithmic utility function:
U(C1,C2)=[ln(C1)+ln(C2)]
where C1 and C2 are the consumption in the first and second periods, respectively. Households are endowed with Q1 and Q2 units of consumption goods in periods 1 and 2 and can borrow or lend at the world interest rate, r1=r*. Every household starts period 1 with B∗0≠ 0. Households can purchase bonds, B∗1, which pay the interest rate r1. The terms of trade in periods 1 and 2 are TT1 and TT2 , respectively.
Then in this economy, the country adjust to____________________changes in the terms of trade by mostly changing____________________and the country adjusts to____________________changes in the terms of trade by mostly changing____________________.
a) temporary; consumption; permanent; the current account
b) temporary; the current account; permanent; consumption
c) permanent; the current account; temporary; the current account
d) permanent; consumption; temporary; consumption
e) None of the above
Include all your derivation (all the equations needed to obtain your result). No credit without a step-by-step description of how you choose the option.
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