Question
Consider the situation of La Nacion, a hypothetical Latin American country. In 2021, La Nacion was a net debtor to the rest of the world.
Consider the situation of La Nacion, a hypothetical Latin American country. In 2021, La Nacion was a net debtor to the rest of the world. Assume that all of La Nacions foreign debt was dollar denominated, and at the end of 2021, its net private foreign debt was $75000 million and the official foreign debt of La Nacions treasury was $55000 million. Suppose that the interest rate on these debts was 2.5% per annum (p.a.) over the London Interbank Offering Rate (LIBOR), and no principal payments are due in 2022. International reserves of the Banco de Nacion, La Nacions central bank, were equal to $18000 million at the end of 2021 and earn interest at LIBOR. There were no other net foreign assets in the country. Because La Nacion is growing very rapidly, there is great demand for investment goods in La Nacion. Suppose that residents of La Nacion would like to 4 import $37000 million of goods during 2022. Economists indicate that the value of La Nacions exports is forecast to be $29000 million of goods during 2022. Suppose that the Banco de Nacion is prepared to see its international reserves fall to $5000 million during 2011. The LIBOR rate for 2022 is 4% p.a.
a. What is the minimum net capital inflow during 2022 that La Nacion must have if it wants to see the desired imports and exports occur and wants to avoid having its international reserves fall below the desired level?
b. If this capital inflow occurs,
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