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| Assume that a country produces an output Q of 50 every year. The world interest rate is 10%. Consumption C is 50 every year, and I = G = 0. There is an unexpected drop in output in year 0, so output falls to 39 and is then expected to return to 50 in every future year. If the country desires to smooth consumption, how much should it borrow in period 0? What will the new level of consumption be from then on? |
