Assume that at the end of 2021, the US government will have a 30 trillion (i.e. 30,000bn) dollars of existing debt. Also assume that the nominal interest rate is 7% and the inflation rate is 6%. (i) In 2022, the government decides to stabilize the debt (at 30 trillion USD). Compute the size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (ii) Instead, now assume that the nominal rates will increase to 10% but the inflation remains unchanged. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iii) Finally, assume that the nominal rates will increase to 10% but the inflation will fall to 3%. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iv) If the government decides to stabilize the debt in 2022 under these three different macroeconomic conditions (i)-(iii), which will be the easiest and which will be the most difficult? (Explain in words why)

Assume that at the end of 2021, the US government will have a 30 trillion (i.e. 30,000bn) dollars of existing debt. Also assume that the nominal interest rate is 7% and the inflation rate is 6%. (i) In 2022, the government decides to stabilize the debt (at 30 trillion USD). Compute the size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (ii) Instead, now assume that the nominal rates will increase to 10% but the inflation remains unchanged. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iii) Finally, assume that the nominal rates will increase to 10% but the inflation will fall to 3%. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iv) If the government decides to stabilize the debt in 2022 under these three different macroeconomic conditions (i)-(iii), which will be the easiest and which will be the most difficult? (Explain in words why)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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