Calculating the debt to GDP ratio Suppose the following statistics characterize the financial health of the hypothetical economy Debtenburg at the end of 2017: • Gross domestic product (GDP) is equal to $180 billion. • The national debt is equal to $234 billion. • The government has a budget deficit of $9 billion. • The debt ceiling in Debtenburg is set at $253 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 $180 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. Year GDP National Debt Ratio of National Debt to GDP (Billions of dollars) (Billions of dollars) 2017 180 234 2018 180 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

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter12: Federal Budgets And Public Policy

Section: Chapter Questions

Problem 3.6P

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Calculating the debt to GDP ratio

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

•	Gross domestic product (GDP) is equal to $180 billion.
•	The national debt is equal to $234 billion.
•	The government has a budget deficit of $9 billion.
•	The debt ceiling in Debtenburg is set at $253 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 $180 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.

Year	GDP	National Debt
(Billions of dollars)	(Billions of dollars)
2017	180	234
2018	180

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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