4. Consider an economy with a strictly positive debt-to-GDP ratio and a primary balance relative to GDP which keeps the debt-to-GDP ratio constant over time. Assume that in so- me period T, the government loosens fiscal policy so that the primary balance decreases for one period and then increases back to its initial level. As a result, the debt-to-GDP ratio increases at least initially. In the next period (period T+1), the primary balance relative to GDP increases back to its initial level (which kept the previous debt-to-GDP ratio constant over time). Real GDP grows at a constant rate g and the real interest rate on government is fixed at r. i) Set the initial debt-to-GDP ratio equal to 100%, r = 2%, g = 3% and assume that the primary balance decreases by 1 percentage point in period T relative to the level which keeps the debt-to-GDP ratio constant over time. Compute how the debt-to-GDP ratio evolves over the next 20 periods and show the results (debt-to-GDP ratio from period T to period T+20)

4. Consider an economy with a strictly positive debt-to-GDP ratio and a primary balance relative to GDP which keeps the debt-to-GDP ratio constant over time. Assume that in so- me period T, the government loosens fiscal policy so that the primary balance decreases for one period and then increases back to its initial level. As a result, the debt-to-GDP ratio increases at least initially. In the next period (period T+1), the primary balance relative to GDP increases back to its initial level (which kept the previous debt-to-GDP ratio constant over time). Real GDP grows at a constant rate g and the real interest rate on government is fixed at r. i) Set the initial debt-to-GDP ratio equal to 100%, r = 2%, g = 3% and assume that the primary balance decreases by 1 percentage point in period T relative to the level which keeps the debt-to-GDP ratio constant over time. Compute how the debt-to-GDP ratio evolves over the next 20 periods and show the results (debt-to-GDP ratio from period T to period T+20)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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