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Question No. 10 ( ME 2 ) ( PAGE 15-16 )
http://economicsentrance.weebly.com/uploads/1/1/0/5/1105777/msqe2011.pdfConsider two countries – a domestic country (with excess capacity and
unlimited supply of labour) and a benevolent foreign country. The
domestic country produces a single good at a fixed price of Re.1 per
unit and is in equilibrium initially (i.e. in year 0) with income at Rs.
100 and consumption, investment and savings at Rs. 50 each.
Investment expenditure is autonomous. Final expenditure in any year t
shows up as income in year t ( Yt ) , but consumption expenditure in
year t ( C t ) is given by: C t = 0.5 Y t −1 . The foreign country agrees to
give a loan of Rs.100 to the domestic country in year 1 at zero interest
rate, but on conditions that it be (i) used for investment only and (ii)
repaid in full at the beginning of the next year. The loan may be
renewed every year, but on the same conditions as above. Find out
income, consumption, investment and savings of the domestic country
in year 1, year 2 and in final equilibrium in each of the following two
alternative cases:
(a) The country takes the loan in year 1 only.
(b) The country takes the loan in year 1 and renews it every year.
Locked
