Assume a 2-period 2-country world with two large open economies: Ambria and Petu

Assume a
2-period 2-country world with two large open economies: Ambria and Petunia.
Ambria has a current account deficit and Petunia has a current account surplus.
Using a model discussed in Topic 7 answer the following questions:a) If
Ambria and Petunia decide to introduce capital controls what would happen to
theircurrent accounts? What would happen to
the interest rates?b) Assume
that there is an anticipated decrease in the future productivity in Petunia.
Analysehow the
equilibrium interest rate and current accounts in Ambria and Petunia would beaffected by
this decrease.Hint:analyse how
saving and investment schedules be affected inPetunia.c) Now
assume that Ambrian government decides to increase its spending in the first
period.How would
this affect the equilibrium interest rate and current accounts in Ambria andPetunia?
Does equilibrium investment get higher or lower in Ambria?d) Finally
assume that the governments of two countries decide to eliminate externalimbalances
using fiscal policies. At the same time they would like to maintain theequilibrium interest rate unchanged. What
kind of policies should these government use?
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