Suppose the following statistics characterize the financial health of the hypothetical economy Debtenburg at the end of 2017: - GDP is equal to $150 billion - The national debt is equal to $180 billion - The government has a budget deficit of $9 billion - The debt ceiling in Debtenburg is set at $198 billion The following calculations help you see how the ratio of debt to GDP changes from one year to the next. Complete the first row of the following table by computing the ratio of national debt to GDP. Suppose that nominal GDP remains at $150 billion in 2018, and again the government runs a budget deficit of $9 billion. For simplicity, assume the interest rate on the national debt is 0%, and no payments are being made to reduce the debt. Calculate national debt and the debt-to-GDP ratio in 2018. Enter these values in the second row of the following table. Now that the government’s national debt has been growing for several years, investors have become worried that the government might default on its debt—that is, might refuse to pay back the investors. As a result, the investors are now willing to lend to the government only if they receive an interest rate of 10%. If the government runs a budget deficit of $10 billion in 2019, the national debt will increase by $_____ billion. True or False: At the end of 2019, the government of Debtenburg will exceed the legal limit on how much it can borrow. (true/false)

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter12: The Public Sector

Section: Chapter Questions

Problem 16SQ

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Suppose the following statistics characterize the financial health of the hypothetical economy Debtenburg at the end of 2017:

- GDP is equal to $150 billion

- The national debt is equal to $180 billion

- The government has a budget deficit of $9 billion

- The debt ceiling in Debtenburg is set at $198 billion

The following calculations help you see how the ratio of debt to GDP changes from one year to the next.

Complete the first row of the following table by computing the ratio of national debt to GDP.

Suppose that nominal GDP remains at $150 billion in 2018, and again the government runs a budget deficit of $9 billion. For simplicity, assume the interest rate on the national debt is 0%, and no payments are being made to reduce the debt.

Calculate national debt and the debt-to-GDP ratio in 2018. Enter these values in the second row of the following table.

Now that the government’s national debt has been growing for several years, investors have become worried that the government might default on its debt—that is, might refuse to pay back the investors. As a result, the investors are now willing to lend to the government only if they receive an interest rate of 10%.

If the government runs a budget deficit of $10 billion in 2019, the national debt will increase by $_____

billion.

True or False: At the end of 2019, the government of Debtenburg will exceed the legal limit on how much it can borrow. (true/false)

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