Question

i need and answer please

In this question, assume all dollar units are real dollars in billions, so $150 means $150 billion. It is year 0. Argentina thinks it can find $150 of domestic investment projects with an MPK of 10% (each $1 invested pays off $0.10 in every later year). Argentina invests $84 in year 0 by borrowing $84 from the rest of the world at a world real interest rate r* of 5%. There is no further borrowing or investment after this. Use the standard assumptions: Assume initial external wealth W (W in year -1) is 0. Assume G = 0 always; and assume I = 0 except in year 0. Also, assume NUT= KA = 0 and that there is no net labor income so that NFIA = r*W. The projects start to pay off in year 1 and continue to pay off all years thereafter. Interest is paid in perpetuity, in year 1 and every year thereafter. In addition, assume that if the projects are not done, then GDP = Q = C = $200 in all years, so that PV(Q)= PV(C) =200 + 200/0.05 = 4,200.

a. Should Argentina fund the $84 worth of projects? Explain your answer (3p)

b. Why might Argentina be able to borrow only $84 and not $150? (2p)

c. From this point forward, assume the projects totaling $84 are funded and completed in year 0. If the MPK is 10%, what is the total payoff from the projects in future years? (5p)

d. Assume this is added to the $200 of GDP in all years starting in year 1. In dollars, what is Argentina’s Q = GDP in year 0, year 1, and later years? (5p)

Answer 1