Reference no: EM131559775

Indonesia's GDP is $200 billion per year, and Indonesia's interest rate is constant at 10%

1. In year 1 Indonesia is hit by a tsunami which causes its income from tourism to drop this year by $110 billion, to only $90 billion. Income will recover back to $200 billion in all subsequent years. What will be the path of Indonesian consumption if Indonesia has no ability to borrow in international capital markets?

2. Assume Indonesian consumers aim to perfectly smooth consumption across all future years, and are able to borrow at an interest rate of 10% from foreigners. Calculate Indonesia's consumption and trade balance in the year of the tsunami and subsequent years.

3. If Indonesian firms have access to international capital markets at an interest rate of 10%, calculate the path of Indonesia's, output, consumption and trade balance in year 2 and subsequent years

4. In year 1 Indonesian acquired substantial foreign debt as a consequence of the tsunami, leading international lenders to worry that they might not be repaid. If foreigners demand an interest rate of 25% to extend additional loans to Indonesia to finance oil exploration, but Indonesian firms can continue to borrow from Indonesian consumers at an interest rate of 10%, calculate Indonesian consumption and output in year 2 and subsequent years.

5. Assuming Indonesia develops the oil deposits, at current oil prices, revenue from the oil fields would represent 10% of Indonesia's income. Given the high volatility of the oil price, this represents a significant source of volatility to aggregate Indonesian income. What international transactions could Indonesia undertake to reduce the volatility of its income?