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A A A Q1. For this question, note that + + + . . . (1+x) (1+x)² (1+X)3 Suppose Country X produces 100 units in each period, beginning with period O. Suppose Country X initially consumes all output, and the interest rate is 0.10. a. If its economy is closed, what is the present value of consumption in Country X? The present value of output? Explain. b. Suppose Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter (that is, beginning in period 1). If the economy is closed - that is, it cannot borrow internationally - should the country do it? If yes, what will be the country's consumption in period 1? What will be its consumption in period 2? Show your work. C. Ignore part b. Suppose now that Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter, but it now can borrow internationally to fund the investment. To smooth consumption, how much will it borrow, and how much will it consume in each period? Show your work.

A A A Q1. For this question, note that + + + . . . (1+x) (1+x)² (1+X)3 Suppose Country X produces 100 units in each period, beginning with period O. Suppose Country X initially consumes all output, and the interest rate is 0.10. a. If its economy is closed, what is the present value of consumption in Country X? The present value of output? Explain. b. Suppose Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter (that is, beginning in period 1). If the economy is closed - that is, it cannot borrow internationally - should the country do it? If yes, what will be the country's consumption in period 1? What will be its consumption in period 2? Show your work. C. Ignore part b. Suppose now that Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter, but it now can borrow internationally to fund the investment. To smooth consumption, how much will it borrow, and how much will it consume in each period? Show your work.

ECON MACRO
ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter9: Aggregate Demand
Section: Chapter Questions
Problem 3.6P
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A A A Q1. For this question, note that + + + . . . (1+x) (1+x)² (1+X)3 Suppose Country X produces 100 units in each period, beginning with period O. Suppose Country X initially consumes all output, and the interest rate is 0.10. a. If its economy is closed, what is the present value of consumption in Country X? The present value of output? Explain. b. Suppose Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter (that is, beginning in period 1). If the economy is closed - that is, it cannot borrow internationally - should the country do it? If yes, what will be the country's consumption in period 1? What will be its consumption in period 2? Show your work. C. Ignore part b. Suppose now that Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter, but it now can borrow internationally to fund the investment. To smooth consumption, how much will it borrow, and how much will it consume in each period? Show your work.
Transcribed Image Text:A A A Q1. For this question, note that + + + . . . (1+x) (1+x)² (1+X)3 Suppose Country X produces 100 units in each period, beginning with period O. Suppose Country X initially consumes all output, and the interest rate is 0.10. a. If its economy is closed, what is the present value of consumption in Country X? The present value of output? Explain. b. Suppose Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter (that is, beginning in period 1). If the economy is closed - that is, it cannot borrow internationally - should the country do it? If yes, what will be the country's consumption in period 1? What will be its consumption in period 2? Show your work. C. Ignore part b. Suppose now that Country X can invest 34 units in period 0 and increase output by 10 units in every period thereafter, but it now can borrow internationally to fund the investment. To smooth consumption, how much will it borrow, and how much will it consume in each period? Show your work.
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