Macroeconomics for Business Debt Sustainability

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BS1780 Macroeconomics for Business Problem Set 3 Group Assignment February 2016 1) Assuming that the nominal interest rate, the inflation rate, the real GDP growth and primary deficit remain constant for the next year, we can compute the projected next year end debt as a percentage of GDP by using the equation: dt+1=dt+i-πdt-grdt-st+1 In this case, dt is the public debt (as % of GDP) of 2011, which is 88%; i is the government interest rate 7% according to our assumption; π is the inflation rate, which was 2% if it is held constant constant in the next year; gr is -1%, the real GDP growth; and -st+1 is the primary deficit, which is 3%. Therefore: dt+1=88%+7%-2%×88%--1%×88%+3%=96.28% Thus, the projected next…show more content…
Most of this change is due to the decrease in primary deficit and interest rate. Real interest rate component of the debt ratio change dropped from 4.4% to 0.44% and the primary deficit component fell from 3% to 0%. However, when examine the years after the loan, we found that the debt ratio starts to rise gradually. It’s notable that the increase is marginal compared to when there is no IMF loan. In this sense, the IMF loan has a prompt effect on mitigating Cyprus debt trouble, but the effect will not last long. To deal the root of the problem, Cyprus needs to work on its real economy. The table above gives what we believe is an unrealistic forecast of what would in fact happen to the Cypriot economy and the debt to GDP
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