Consider the following example of an economy whose population wishes to smooth consumption. In this economy, output
Question:
Consider the following example of an economy whose population wishes to smooth consumption. In this economy, output Q (GDP) is generated by a tree that bears fruits. That is, the economy produces fruits, and consumers consume fruits. To start with, assume that the tree produces Q = $200 billion worth of fruits every year (in real terms). This economy does not have a need for investment and does not have a government (GNE = C and I = G = 0). Also assume that initial wealth is zero and that the world real rate of interest is r=0.04 (or 4 %). For each of the following scenario, find the numerical values of consumption, the trade balance, net factor income from abroad, and external wealth for every period. In addition, compare your answer for this open economy to your answer for a closed economy. The scenarios are
a) No shocks.
b) Current shock: Assume that at time 0, the economy is hit with a temporary income shock where GDP rises to Q0=$330 billion but future GDP remains at Q=$200 billion.
c) Future shock: Assume that initial GDP remains at Q0=$200 billion but all future GDP rise to Q=$330 billion.
d) Permanent shock: Assume that initial and all future GDP rise to Q0=Q=$330 billion.
*Please show all relevant work, graphs, and explanations.
Modern Business Statistics with Microsoft Excel
ISBN: 978-1337115186
6th edition
Authors: David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran