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QUESTION
Consider an open country of which initial wealth is zero, and its consumers prefer consumption smoothing. The value of output is initially $1 billion....
- Consider an open country of which initial wealth is zero, and its consumers prefer consumption smoothing. The value of output is initially $1 billion. The world real interest rate is 5% and the inflation rate is zero. Suppose output increases by 20% for one period and returns to $1 billion thereafter.
- Calculate the level of consumption and trade balance in each period.
- Calculate net factor income account, current account and external wealth in
- response to the increase in output.
- Suppose that the 20% increase in output lasts for two periods. Calculate
- consumption and trade balance in this case.
- Calculate net factor income account, current account and external wealth in
- response to the increase in output in Part (d).
