Consider an economy characterized by the following facts: • The debt-to-GDP ratio is 40% • The primary deficit is 4% of GDP • The growth rate of GDP is 3%. • The real interest rate is 3%, and there is no inflation. (a) Using your favorite spreadsheet software, compute the debt-to-GDP ratio in 10 years, assuming that the primary deficit stays at 4% of GDP each year; the economy grows at the normal growth rate in each year; and the real interest rate is constant, at 3%. (b) Suppose the real interest rate increases to 5%, but everything else remains as in part (a). Compute the debt-to-GDP ratio in 10 years. (c) Suppose the normal growth rate falls to 1%, and the economy grows at the normal growth rate each year. Everything else remains as in part (a). Calculate the debt-to-GDP ratio in 10 years and compare your answer to part (b)
Consider an economy characterized by the following facts: • The debt-to-
Step by step
Solved in 4 steps with 3 images
