Assume that all dollar units are real dollars in billions. It is year 0. Russia plans to raise $24 billion to finance domestic investment projects with a marginal product of capital (MPK) equal to 8%. Russia has the option to borrow $20 billion from the rest of the world at the world real interest rate, r* = 4%. After year 0, Russia neither borrows nor invests (I = 0 in all years except year 0). Use the standard assumptions: no initial external wealth, no government spending (G = 0); and assume that I = 0 except in year 0, and no unilateral transfers or capital gains (NUT = KA = 0) so that there is no net labor income and NFIA = r*W. The projects start to pay off in year 1 and pay off all years thereafter. Interest is paid in perpetuity in year 1 and every year thereafter. In addition, assume that if the projects are not done, then Q = $300 billion in all years and.

a. Should Russia fund these projects?

b. State two reasons that Russia may be unable to obtain the full $24 billion needed to finance all of its efficient investment opportunities.

c. From this point forward, assume that the $20 billion in projects are funded and completed in year 0. If the MPK is 8%, what is the total payoff from projects in future years?

d. What is Russia’s Q = GDP in year 0 in dollars? In year 1 and later years in dollars?

e. At year 0, what is the new PV(Q) in dollars?

f. At year 0, what is the new PV(I) in dollars? What is the new PV(C) in dollars?

g. Assume that Russia is consumption smoothing. What is the percentage change in PV(C)? What is the new level of consumption (C) in all years? Is Russia better off?

h. For the year the projects go ahead, year 0, calculate Russia’s CA, TB, NFIA, and FA.

i. What about in later years? State the levels of CA, TB, NFIA, and FA in year 1 and thereafter.