An open economy's output is expected to be 100 units forever and it can borrow and lend freely from the rest of the world at an interest rate 10%. Assume that the initial wealth is zero and there are no unilateral transfers. An investment opportunity for this economy arises whereby an investment of 45 units in the first period (i.e., t = 0) will increase its output by 10 units forever thereafter (i.e., from t = 1 onwards). However, in t=0 the output will remain at 100. Shall the economy borrow and undertake this investment? If the economy always chooses a smooth consumption, what will be the consumption level that it will choose? What will be the trade balance in period 0? What will be the wealth level at the end of period 0? What is the trade balance, NFIA, Current account, and wealth level at the end of period 1, 2, 3,...

An open economy's output is expected to be 100 units forever and it can borrow and lend freely from the rest of the world at an interest rate 10%. Assume that the initial wealth is zero and there are no unilateral transfers. An investment opportunity for this economy arises whereby an investment of 45 units in the first period (i.e., t = 0) will increase its output by 10 units forever thereafter (i.e., from t = 1 onwards). However, in t=0 the output will remain at 100. Shall the economy borrow and undertake this investment? If the economy always chooses a smooth consumption, what will be the consumption level that it will choose? What will be the trade balance in period 0? What will be the wealth level at the end of period 0? What is the trade balance, NFIA, Current account, and wealth level at the end of period 1, 2, 3,...

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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