II. International Borrowing and Lending, .ong Run This information 1s for the next three questions. Consider a country that has no initial wealth or debt and that can produce 100 units of output now and 70 units in the future. If the country makes an investment of 20 now it can produce an additional 30 units in the future. The country has strong preferences for consumption smoothing with utility curve U=min(Co,C1). The world interest rate 1s 1. 6. Suppose the country cannot borrow or lend. Would the country choose to do the investment? Explain using the appropriate diagram. (5pts) 7. Now suppose that the country could borrow or lend at the world real interest rate. Under what conditions would the country choose NOT to do the same investment? Show this situation in the appropriate diagram. (10pts) 8. Interpret your results in the previous question using Balance of Payments accounting for the period t=1 (1.e. components of the current account, etc) (5pts) 9. What evidence is there that many countries gain little from international credit markets? What assumptions of the model might be the cause of its problem predicting these countries situations and what part of the data suggest this explanation? Refer to the cases considered in class. (15pts) 10. Suppose that a country is unable to borrow on international credit markets, how might it still benefit from being open to international financial markets? (Spts)