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16.Consider 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 (say, Yt) , but consumption expenditure in year t
(say, Ct) is given by: Ct = 0:5Ytô€€€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 the income, consumption, investment and
savings of the domestic country in year 1, year 2 and in final equilibrium
when the country takes the loan in year 1 only.
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