Question
Assume all dollar units are real dollars in billions. It is year 0. Russia plans to raise $24 billion to finance domestic investment projects with
Assume all dollar units are real dollars in billions. It is year 0. Russia plans to raise $24 billion to finance 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.
Should Russia fund these projects? Based on the figures in the last question, what is Russia's Q = GDP in year 0 and in year 1 and later years, in billions dollars?
At year 0, what is the new present value of output PV(Q) in billions of dollars?
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