ECN 260B Final: ECN 260B Final Exam Fall 2014
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Directions: answer all 3 questions below, which are equally weighted. There is one good used for consumption, and each country receives an endowment of this good each period. The two-period utility function of the representative home household is: log. 1c represents consumption in period 1 and log. The where foreign utility function is identical, where foreign variables are indicated by a *. Home endowment is 1y in period 1 and period 2. Assume that both countries have identical constant endowments unless told otherwise. Assume there is no bond holding prior to period 1. Note: since this is a two-country model rather than a small open economy, the world interest rate, r, is endogenously determined in the model. (a) find the intertemporal first order condition for the home country, and solve for the. 1 consumption function, as a function of the home endowments and the world real interest rate.
