4. The equation representing debt dynamics for an economy can be written as follows. Gt-Tt Yt b₁ = a + (r-g)bt-1 ; α = Here, bt represents the change in the debt/GDP ratio, r represents the real interest rate, g represents the growth rate, and bt-1 represents the debt ratio of the previous period. The graphs below represent the borrowing interest rates (r) and growth rates (g) of two different countries. Suppose the budget is in balance in both countries (a = 0). Briefly explain in what direction the debt change ratio of countries A and B separately, according to the equation given above and the graphs below.

4. The equation representing debt dynamics for an economy can be written as follows. Gt-Tt Yt b₁ = a + (r-g)bt-1 ; α = Here, bt represents the change in the debt/GDP ratio, r represents the real interest rate, g represents the growth rate, and bt-1 represents the debt ratio of the previous period. The graphs below represent the borrowing interest rates (r) and growth rates (g) of two different countries. Suppose the budget is in balance in both countries (a = 0). Briefly explain in what direction the debt change ratio of countries A and B separately, according to the equation given above and the graphs below.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

4. The equation representing debt dynamics for an economy can be written as follows.
Gt-Tt
Yt
Here, bt represents the change in the debt/GDP ratio, r represents the real interest rate, g represents the
growth rate, and bt-1 represents the debt ratio of the previous period. The graphs below represent the borrowing
interest rates (r) and growth rates (g) of two different countries. Suppose the budget is in
balance in both countries (a = 0). Briefly explain in what direction the debt change ratio of countries A and B
separately, according to the equation given above and the graphs below.
5432
Scorn
ن
-4
-5
3/1/09
12/1/09
9/1/10
Arm
TT/T/9
Zt/t/E
Country A
b = a + (rg)bt-1 ; α =
12/1/12
ET/T/6
6/1/14
ST/T/E
12/1/15
9t/t/6
LT/T/9
3/1/18
12/1/18
6T/T/6
30
25
20
15
10
5
-15
60/1/2
1/1/10
OT/T/TT
TT/T/6
Country B
7/1/12
5/1/13
DT/T/E
1/1/15
11/1/15
g
9T/T/6
LT/T/L
5/1/18
3/1/19

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