5. Assume all dollar units are real dollars in billions. It is year 0. Russia plans to raise $24 billion to nance domestic investment projects with a marginal product of capital (MPK) equal to 8%. Russia has the option to borrow $20 billion from the rest of the world at the world real interest rate, r* = 4%. After year 0, Russia neither borrows nor invests (I = 0 in all years except year 0). Use the standard assumptions: no initial external wealth W (W- 1 = 0), no government spending (G = 0); and assume I = 0 except in year 0, and no unilateral transfers or capital gains (NUT = KA = 0), so that there is no net labor income and NFIA = r*W. The projects start to pay off in year 1 and all years thereafter. Interest is paid in perpetuity in year 1 and every year thereafter. In addition, assume that if the projects are not done then Q = $300 billion in all years and PV(Q) = 7,800. a. Should Russia fund these projects? Why? b. From this point forward, assume the $20 billion in projects are funded and completed in year 0. If the MPK is 8%, What is the total payoff from projects in future years? c. What is Russia's Q =GDP in year 0 in 35? In year 1 and later years in $? (1. At year 0, What is the new PV(Q) in $? e. At year 0, what is the new PV(I) in $? What is the new PV(C) in 33? f. Assume that Russia is consumption smoothing. What is the percent change in PV(C)? g. For the year the projects go ahead, year 0, calculate Russia's CA, TB, NFIA, and FA. h. What about in later years? State the levels of CA, TB, NFIA, and FA in year 1 and thereafter. Useful Formulas: EHIF - EHIF Fe qHIF = (EHIFPF )/ PH PH i = i* EHIF= =1F + + LH PF EHIF E FA = CA + KA S =I+ CA S = Spts g Change in External Wealth = AW = CA + KA + Valuation Effects Change in Domestic Wealth = AWD = I + Capital Gains on K PV(Q) = PV(C) + PV(I) AQ PV(Q) = 0+2 MPK 27* AK