![Question 2 [4 points] Consider two countries with the same level of potential GDP, say $100 billion, today. Suppose potential](http://img.homeworklib.com/questions/e1a71690-7a53-11ea-b02a-e58b0e974bd7.png?x-oss-process=image/resize,w_560)
Homework Answers
Answer 2
(a)
Formula :
A = P(1 + r)n
where A = amouunt after n years, P = initial value, r = interest rate and n = time period
Country One :
P = Initial GDP = 100 billion, r = 5.5% = 0.055 and n = 40 and we have to calculate A
=> A = P(1 + r)n = 100 billion(1 + 0.055)40 = 851.33 billion.
Hence, Potential GDP in Country One = 851.33 billion.
Country Two :
P = Initial GDP = 100 billion, r = 2.6% = 0.026 and n = 40 and we have to calculate A
=> A = P(1 + r)n = 100 billion(1 + 0.026)40 = 279.19 billion.
Hence, Potential GDP in Country Two = 279.19 billion.
(b)
Country One :
P = Initial GDP = 100 billion, r = 5.5% = 0.055 and n = 65 and we have to calculate A
=> A = P(1 + r)n = 100 billion(1 + 0.055)65 = 3246.46 billion.
Hence, Potential GDP in Country One = 3246.46 billion.
Country Two :
P = Initial GDP = 100 billion, r = 2.6% = 0.026 and n = 65 and we have to calculate A
=> A = P(1 + r)n = 100 billion(1 + 0.026)65 = 530.37 billion.
Hence, Potential GDP in Country Two = 530.37 billion.
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