Assume that in an economy the real interest rate equals r=0.05, the rate of growth of real GDP equals y = 0.03, and the primary deficit-to-GDP ratio equals d=0.03 and is expected to remain constant. a) Write the equation for the dynamics of debt-to-GDP ratio and show the dynamics in a graph. In the case the debt stabilizes, calculate the equilibrium level of debt (as % of GDP). b) What should be the level of the real interest rate (r), to stabilize debt-to-GDP at 150% without change in the primary deficit? Present this situation in a graph.

Assume that in an economy the real interest rate equals r=0.05, the rate of growth of real GDP equals y = 0.03, and the primary deficit-to-GDP ratio equals d=0.03 and is expected to remain constant. a) Write the equation for the dynamics of debt-to-GDP ratio and show the dynamics in a graph. In the case the debt stabilizes, calculate the equilibrium level of debt (as % of GDP). b) What should be the level of the real interest rate (r), to stabilize debt-to-GDP at 150% without change in the primary deficit? Present this situation in a graph.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter30: Government Budgets And Fiscal Policy

Section: Chapter Questions

Problem 51P: A government starts off with a total debt of $3.5 billion. In year one, the government runs a...

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