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# Beta Borrower, Celta Shock Assignment Answers

Suppose the world consists of two countries, Beta and Celta, only. Initially, the market for loanable funds in both countries can be described by the following equations: Demand for loanable Supply of loanable Country funds funds Beta DFB = 300 - 21B SFB = 120 + 8ig Celta DFc = 130 - 5ic SFC = 50 + 101c Note: Interest rates are expressed in percentage points (.e., if i = 5, then i = 5%). When the international flows of capital are allowed, the equilibrium world interest rate is 10.4% I Now, suppose the government of Celta lowers tax on business income such that the quantity of funds demanded changes by 35 at any given level of interest rate. (You need to decide how to incorporate the shock into the model). The new equilibrium level of world interest rate = % (Keep your answer to 1 decimal place if needed) The level of net foreign investment in Celta - (Keep your answer to 1 decimal place if needed) Which country is a borrower in the world loanable funds market? Answers (Beta or Celta)

# Assignment Help Answers with Step-by-Step Explanation:

2. To find the new equilibrium world interest rate, we need to equate the total demand for loanable funds to the total supply of loanable funds in the world market:

Total Demand = Total Supply

i = (315 - 21B - 5ic - 8ig - 101c)

Given that the equilibrium world interest rate is 10.4% initially (i = 10.4%), we can substitute this value into the equation and solve for the new B, C, and ig:

10.4 - 315 = -21B - 5ic - 8ig - 101c

-304.6 = -21B - 5ic - 8ig - 101c

NFIc = SFC - DFc

NFIc = (50 + 101c) - (130 - 5ic + 35)

For Celta:

NFIc = 5ic + 101c - 80

NFIb = SFB - DFB

NFIb = (120 + 8ig) - (300 - 21B)

Now, let's determine which country is a borrower:

NFIc = 1022.4 (positive)

21B < 96.8

B < 96.8 / 21

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