Question
Atlantis is a small, open economy, with a constant annual output of 2,000 and G=I=W=0 until year-1.Inyear 0, Atlantisgetsan investment opportunity which requires animmediate, one-timeinputof50
Atlantis is a small, open economy, with a constant annual output of 2,000 and G=I=W=0 until year-1.Inyear 0, Atlantisgetsan investment opportunity which requires animmediate, one-timeinputof50 and will raiseitsoutputpermanentlyby9.4 fromyear 1 onward.Due to its good credit ratingsand low sovereign risk, Atlantis can borrow/lend internationally at a constant interest rate of10%,subject to its long-run budget constraint(LRBC).
1. If Atlantisundertakes this investmentinyear 0, compute itsconsumption, trade balance, NFIA(net factor income from abroad), current account and external wealth inyears 0,1,2,3, ...Report the intermediate steps andfill out the table below.Explain intuitively whether Atlantis'investment affects the present value of its trade balance inyear-0 terms.
year | -1 | 0 | 1 | 2,3,... |
Output | 2,000 | 2,000 | 2,009.4 | 2,009.4 |
investment | 0 | 50 | 0 | 0 |
consumption | 2,000 | |||
Trade balance | 0 | |||
NFIA | 0 | |||
Current account | 0 | |||
External wealth | 0 |
2. Based on your findings, explainintuitively howAtlantis benefits from accessing internationalfinancial markets in this scenario
3. Oasis is another small open economy. Due to its poor credit ratings and high sovereign risk, itcan borrow frominternational financial markets at a constant interest rate of20%, subject toits LRBC. If the investment opportunity mentioned above is also available for Oasis, explainnumerically and intuitively whether Oasis should undertakethis investment
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