1. Consider two large open economies, Home and Foreign (foreign variables that need not
   be equal to Home variables are denoted by an asterisk. Each economy is inhabited by
   a continuum of identical individuals grouped into an aggregate risk sharing household.
   In each country there is also a representative Önal goods producing Örm. Lifetime
   utility is given by:
   U = Et
   X1
   t=0

   t
   ln Ct and U
   = Et
   X1
   t=0

   t
   ln C

t
,
where: Et
is the expectation operator,  2 (0; 1) is the (constant) subjective discount
factor, and C and C
denote consumption. Production in each country is determined
by:
Yt = AtK
t and Y

t = A

t K
t
,
1