Consider a country that experiences a positive, one-time shock to its output. Assume that output is initially $1,200 per year and the world real interest rate is 6%. In year 0, output increases by 20%, after which it returns to its initial level.

a. Calculate the present value of output in this economy

b. Assume the economy is a closed economy. Calculate the present value of consumption and level of consumption each period, assuming the country engages in consumption smoothing.

c. Assume the economy is an open economy. Calculate the present value of consumption and the level of consumption each period, assuming the country engages in consumption smoothing.

d. For the open economy, calculate TB, FA, NFIA, and TB in year 0. What happens to this country’s external wealth in period 0?

e. For the open economy, calculate TB, NFIA, and CA in subsequent years. What happens to this country’s external wealth in period 0?

f. How would your previous answers differ if the shock were a permanent increase in output? Explain.