3. Imagine an open economy that faces a real world interest rate of 2% and has...

 

Transcribed Image Text:

3. Imagine an open economy that faces a real world interest rate of 2% and has a yearly GDP of 1,000. This economy wants to smooth its consumption so that it is the same in every period. Suppose that the country is considering investing into a major infrastructure project. If it invests 230 units today, GDP will climb to 1,025 in every year that follows. Period Y C I TB NFIA CA Wealth 2 3 1 1,000 1,025 1,025 4 1,025 *** www *** *** *** PV a) (10 Marks) Complete the table to show how the economy could smooth its consumption. b) (10 Marks) Describe (using words) what actions the economy has taken to smooth its consumption. In other words, explain the path that each variable in the table takes. 3. Imagine an open economy that faces a real world interest rate of 2% and has a yearly GDP of 1,000. This economy wants to smooth its consumption so that it is the same in every period. Suppose that the country is considering investing into a major infrastructure project. If it invests 230 units today, GDP will climb to 1,025 in every year that follows. Period Y C I TB NFIA CA Wealth 2 3 1 1,000 1,025 1,025 4 1,025 *** www *** *** *** PV a) (10 Marks) Complete the table to show how the economy could smooth its consumption. b) (10 Marks) Describe (using words) what actions the economy has taken to smooth its consumption. In other words, explain the path that each variable in the table takes.

Answer rating: 100% (QA)

a Period 1 2 3 4 PV Y 1000 1025 1025 1025 CI 1000 1025 1025 102... View the full answer