economic arguments for that position? 9. In this chapter, we saw that financial market integration is necessary for countries to smooth consumption through borrowing and lending. Consider two economies: those of the Czech Republic and France. For each of the following shocks, explain how and to what extent each country can trade capital to better smooth consumption. a. The Czech Republic and France each experience an EU-wide recession. b. A strike in France leads to a reduction in French income. c. Floods destroy a portion of the Czech capital stock, lowering Czech income. 10. Assume that a country produces an output Q of 50 every year. The world interest rate is 10%. Consumption C is 50 every year, and I= G= 0. There is an unexpected drop in output in year 0, so output falls to 39 and is then expected to return to 50 in every future year. If the country desires to smooth consumption, how much should it borrow in period 0? What will the new level of consumption be from then on? 11. Assume that a country produces an output Q of 50 every year. The world interest rate is 10%. Consumption C is 50 every year, and I =G =0. There is an unexpected war in year 0, which costs 11 units and is predicted to last one year. If the country desires to smooth consumption, how much should it borrow in period 0? What will the new level of consumption be from then on? The country wakes up in year 1 and discovers that the war is still going on and will eat up another 11 units of expenditure in year 1. If the country still desires to smooth consumption looking forward from year 1, how much should it borrow in period 1? What will be the new level of consumption be from then on? 12. Consider a world of two countries, Highland (H) and Lowland (L). Each country has an average output of 9 and desires to smooth consumption. All income takes the form of capital income and is fully consumed each period. a. Initially, there are two states of the world: Pestilence (P) and Flood (F). Each happens with 50% probability. Pestilence affects Highland and lowers the output there to 8, leaving Lowland unaffected with an output of 10. Flood affects Lowland and lowers the output there to 8, leaving Highland unaffected with an output of 10. Devise a table with two rows corresponding to each state (rows marked P and F). In three columns, show income to three portfolios: the portfolio of 100% H capital, the portfolio of 100% L capital, and the portfolio of 50% H - 50% L capital