Solution:
10. The new level of consumption be from then on is:
We know , output (Z) = C+ I + G + X , where X is export minus
import
When Consumption is 50 and Z is also 50
We have , 50 = 50 + I+G
=> I+G = 0
=> Left hand side = right hand side
Now, output is 39 but the consumption is 50
=> 28 = 50 +I+G (I+G= 0)
=> 28 is not equal to 50
So, to meet the consumption of 28 we need extra 50-28 = 22
quantity of output.
Therefore, the present value of consumption PV(C) is PV(Q) - PV(G)
= 28 +50/0.10 = 528
In order to determine level of consumption for each period, we know
that the country will try to maintain the given level of
consumption:-
i.e. PV(C) = C + C/r*
=> 528 = C+ C/0.10
=> C = 48
So, as the output drops to 28 in the year 0 , the country must
burrow 20 units in the period 0 to consume 48
units as for every 20 units consumed the consumption level goes
down by 2 unit i.e. NFIA= 20*0.1 = 2 unit in
subsequent periods.So, we can say C= 48 units in period 0 and the
change in consumption/ new level of consumption can be calculated
as :-
Change in consumption = r* /(1+r*) * Change
in quantity = 0.10/(1+0.10) * (-22) = -2
Hence, consumption decrease by 2 unit to C= 48
units
10. Assume that a country produces an output I of 50 every year. The world interest...
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