Given the ratio of govemment debt to GDP in nominal term is: B %3D PY Where B is the nominal value of government bonds (debts) outstanding, P is the price level and Y is real GDP. Assume that the total deficit of government budget will be financed by issuing new debt. 1. Prove that change in the ratio of government debt to GDP is (total deficit/GDP) minus the product of (Debt/GDP) and growth rate of nominal GDP. 2. Using the formula proved in part 1 to find the largest nominal deficit that the government can run without raising the debt/GDP ratio, under the following set of assumptions: a. Nominal GDP growth is 5% and outstanding nominal government debt is 1500. b. Real GDP is 20,000 and stays constant, nominal GDP is initially 30,000, inflation is 4% and the debt/GDP ratio is 1.2

Given the ratio of govemment debt to GDP in nominal term is: B %3D PY Where B is the nominal value of government bonds (debts) outstanding, P is the price level and Y is real GDP. Assume that the total deficit of government budget will be financed by issuing new debt. 1. Prove that change in the ratio of government debt to GDP is (total deficit/GDP) minus the product of (Debt/GDP) and growth rate of nominal GDP. 2. Using the formula proved in part 1 to find the largest nominal deficit that the government can run without raising the debt/GDP ratio, under the following set of assumptions: a. Nominal GDP growth is 5% and outstanding nominal government debt is 1500. b. Real GDP is 20,000 and stays constant, nominal GDP is initially 30,000, inflation is 4% and the debt/GDP ratio is 1.2

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter12: Federal Budgets And Public Policy

Section: Chapter Questions

Problem 3.8P

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