Financial Globalization Assume that a country produces an output Q of 50 every year, and that...

Financial Globalization

Assume that a country produces an output Q of 50 every year, and that the world interest rate is 10%. The country currently plans a consumption level C equal to 50 every year, with G =I = 0. But there is then an unexpected war in year 0, which requires government spending of G=22 units in year 0. The war is expected to last just one year. If the country desires to smooth consumption, how much should it borrow in the global financial market in period 0 to finance the war? What will the level of consumption be in year 0 (and all future periods)?

Expert Solution

Rahul Sunny answered 2 years ago

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