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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.
1.a) (15 points) Use the logarithmic model (U=Th(C1)+/n(C2)) from Chapter 3 to answer this multiple choice problem. In the two-period logarithmic model reviewed in class. the change in the Current Account caused by a temporary positive INCOME (endowment) shock is the change caused by a permanent positive INCOME shock.
(a) greater than (b) smaller than (c) equal to (d) None of the above
Use equations to support your answer. No credit without a detailed explanation (i.e.. mathematical proof) of why you are choosing one of the options. copyright
1.b) (15 points) Use again the model from Chapter 3 to answer this multiple choice problem. If the household’s initial asset position is positive. $0 >0. then the initial endowment (Q1.Q2) is located the intertemporal budget constraint (IBC) and this in turn implies that it is for the household to consume its endowment in each period; C1=Q1 and
CrQ2.
(a) above; feasible (affordable) (b) above; not feasible (not affordable) (c) below; feasible (affordable) (d) below; not feasible (not affordable) (e) None of the above
Use the equation and the graph of the intertemporal budget constraint (IBC) to support your answer (with C2 on the vertical axis and C1 on the horizontal axis). Describe your reasoning in detail.
