Question
In this question assume all dollar units are real dollars in billions, so $300 means $300 billion. It is year 0. Argentina thinks it can
In this question assume all dollar units are real dollars in billions, so $300 means $300 billion. It is year 0. Argentina thinks it can find $300 of domestic investment projectswithan MPK of 20%(each$1investedpaysoff$0.20ineverylater year). Argentina invests $100 in year 1 by borrowing from the rest of the world at a world real interest rate r*of 10%. There is no further borrowingor investment after year 1.Use the following assumptions: Assume initial external wealth W-1= 20. Assume G=0 always; and assume I=0 except in year 1. Assume NUT= KA = 0and that there is no net labor income. The projects start to pay off in year 2and continue to pay off all years thereafter. Interestispaidinperpetuity,inyear 2andeveryyearthereafter.Inaddition, assume that if the projects are not done, then GDP=Q= $100in all years, so that: PV(Q) =100+100/0.1=1,100.Assumethat Argentinaissmoothing consumption.
a.Suppose the project is not funded. At year 0, what does the LRBC say is the PV(C) in dollars? What is consumption in every period?
b.From this point forward, assume the projects totalling $100 are funded and completed in year 1. If the MPK is 20%, what is the total payoff from the projects in years2 and after?
c.Assume this is added to the $100 of GDP in all years starting from year 2. In dollars, what is Argentina's Q =GDP in year 0, year 1, year 2, and later years?
d.At year 0, what is the new PV(Q) in dollars?
e.At year 0, what is the new PV(I) in dollars? Therefore, what does the LRBC say is the new PV(C) in dollars?
f.Assume that Argentina is smoothing consumption. What is the new level of C in all years? (answer accuracy = 2 decimals)
g.For years 0,1, and 2 explain Argentina's balance of payments as follows: State the levels of CA, TB, NFIA, FA, and W. (answer accuracy = 2 decimals)
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