Consider an open country of which initial wealth is zero, and its consumers prefer consumption smoothing. The value of output is initially $1 billion….

  1. 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.
  2. Calculate the level of consumption and trade balance in each period.
  3. Calculate net factor income account, current account and external wealth in
  4. response to the increase in output.
  5. Suppose that the 20% increase in output lasts for two periods. Calculate
  6. consumption and trade balance in this case.
  7. Calculate net factor income account, current account and external wealth in
  8. response to the increase in output in Part (d).
 
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