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Assume that a country produces an output Q

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Assume that a country produces an output Q of 50 every year. The;world interest rate is 10%. Consumption C is 50 every year, and I = G = 0. There is an unexpected;war in year 0, so output falls to 39 and is then expected to return to 50 in every future year.;If the country desires to smooth consumption, how much should it borrow in period 0? What;will the the level of consumption and the trade balance be from then on?;If the shock were permanent how would this change?;Why would a country desire to smooth consumption?

 

Paper#27401 | Written in 18-Jul-2015

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