Problem 1: Three-period consumption-savings problemConsider a three-period decision problem:max u(co) + Bu(cı) + 3²u(c2)subject to the flow budget constraints for t = 0, 1, 2:br+1 = (1+r)be + Yt - Ct;where bo is the initial wealth of the country.1. Explain why in this three-period model it cannot be that bz < 0 and it should notbe that b3 > 0.2. Given this, use the flow budget constraints to derive the intertemporal budget con-straint:C1Co +C2Y1= (1+r)bo + yo +Y21+r(1+ r)21+r(1+r)2Interpret this equation.3. Show that the intertemporal budget constraint is equivalent tonx2(1+r)bo + nxo+= 0,(1+r)²1+rwhere nx = yt - 4. Explain (in words) why it is also equivalent to bo+ cao+ca, +caz = 0, where ca = rb, + nx = b+1 – bt, and why this latter equation features nodiscounting.When is it possible to have nx <0 for every t 0, 1, 2 and why? Which countrythat we discussed might fit this description? Does it violate the logic that all tradedeficits must be compensated by trade surpluses?14. Using your favorite method, derive the intertemporal optimality conditions for t = 0, 1:u'(c) = B(1+ r)u' (C+1).What are the implications of this optimality condition for c1, c2 and c3.5. Assume bo = 0 and 3 = 1 and r = 0. Solve for consumption co, net exports nro,and current account cao, by defining the concept of permanent income g. Interpretyour results by providing examples for different cases of yo and g.Discuss intuitively how the result change in each of the cases: bo < 0, B < 1, andr > 0.

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Consider a three-period decision problem: max subject to the flow budget constraints for t = 0, 1, 2: bt+1 = (1+r)b₁ + Yt - Cr₂ u(co)+Bu(c)+3*u(cz) where bo is the initial wealth of the country. 1. Explain why in this three-period model it cannot be that b3 <0 and it should not be that b3 > 0.

Consider a three-period decision problem: max subject to the flow budget constraints for t = 0, 1, 2: bt+1 = (1+r)b₁ + Yt - Cr₂ u(co)+Bu(c)+3*u(cz) where bo is the initial wealth of the country. 1. Explain why in this three-period model it cannot be that b3 <0 and it should not be that b3 > 0.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter5: Business And Economic Forecasting

Section: Chapter Questions

Problem 2E

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