Assume that Oasis is a small open economy and the world interest rate ( ) is constant at 10%. The net employment income from abroad, the net unilateral transfer, and the capital account remain constant at zero. Besides, there is no valuation effect. Prior to year 0, Oasis has a constant annual output (Q) of 100. Given I=G=TB=W=0, Oasis fully consumes its output every year. In year 0, the outbreak of a highly infectious disease hits Oasis. In order to keep the disease under control, the government implements two policies. First, the government upgrades the medical equipment in public hospitals and plans for a national-wide vaccination, which raises government expenditure (G) by 14 in year 0 and by 6.6 in year 1, respectively. Second, the government implements travel restrictions and regional lockdowns, which is expected to lower output (Q) to 84 in year 0 and 91.2 in year 1. With the vaccination rollout, the lockdowns will not be necessary in year 2 and later. Thus, output is expected to return to 100 from year 2 onwards. (a) If Oasis desires to smooth consumption, how much should it borrow from abroad in year 0 and in year 1, respectively? Calculate the new consumption level and the evolution of trade balance, net factor income from abroad (NFIA), current account, and external wealth for year 0, 1, 2, 3 (and later). Summarize your results in the table. [hint: report intermediate steps.]

	Year 0	Year 1	Year 2	Year 3 and later
output	84	91.2	100	100
Government expenditure	14	6.6	0	0
consumption
Trade balance
NFIA
Current account
External wealth

In year 1, a more infectious variant arises unexpectedly, due to virus mutation. The government has to implement a more stringent lockdown policy, which lowers output (Q) from 91.2 to 80. In order to speed up the nationwide vaccination and complete it by the end of year 1, the government raises its expenditure from 6.6 to 17.4 in year 1. From year 2 on, the lockdown is not necessary and hence, domestic output will return to 100 and the government expenditure will return to zero. (b) If Oasis still desires to smooth consumption, how much should it borrow from abroad in year 1? Calculate the new allocation plan for consumption and trade balance for year 1, 2, 3 (and later). Summarize your results in the table. Calculate the current account and external wealth W for year 1. [hint: report intermediate steps.]

	Year 1	Year 2	Year 3 and later
output	80	100	100
Government expenditure	17.4	0	0
consumption
Trade balance