4. Continuing from the previous question, we now consider Argentina’s external wealth position.

a. What is Argentina’s external wealth W in year 0 and later? Suppose Argentina has a one-year debt (i.e., not a perpetual loan) that must be rolled over every year. After a few years, in year N, the world interest rate rises to 15%. Can Argentina stick to its original plan? What are the interest payments due on the debt if r* = 15%? If I = G = 0, what must Argentina do to meet those payments?

b. Suppose Argentina decides to unilaterally default on its debt. Why might Argentina do this? State the levels of CA, TB, NFIA, and FA in year N and all subsequent years. What happens to the Argentine level of C in this case?

c. When the default occurs, what is the change in Argentina’s external wealth W? What happens to the rest of the world’s (ROW’s)

external wealth?

d. External wealth data for Argentina and ROW are recorded in the account known as the net international investment position.

Is this change in wealth recorded as a financial flow, a price effect, or an exchange rate effect?