Given the ratio of govemment debt to GDP in nominal term is: B %3D PY Where B is the nominal value of government bonds (debts) outstanding, P is the price level and Y is real GDP. Assume that the total deficit of government budget will be financed by issuing new debt. 1. Prove that change in the ratio of government debt to GDP is (total deficit/GDP) minus the product of (Debt/GDP) and growth rate of nominal GDP. 2. Using the formula proved in part 1 to find the largest nominal deficit that the government can run without raising the debt/GDP ratio, under the following set of assumptions: a. Nominal GDP growth is 5% and outstanding nominal government debt is 1500. b. Real GDP is 20,000 and stays constant, nominal GDP is initially 30,000, inflation is 4% and the debt/GDP ratio is 1.2

Given the ratio of govemment debt to GDP in nominal term is: B %3D PY Where B is the nominal value of government bonds (debts) outstanding, P is the price level and Y is real GDP. Assume that the total deficit of government budget will be financed by issuing new debt. 1. Prove that change in the ratio of government debt to GDP is (total deficit/GDP) minus the product of (Debt/GDP) and growth rate of nominal GDP. 2. Using the formula proved in part 1 to find the largest nominal deficit that the government can run without raising the debt/GDP ratio, under the following set of assumptions: a. Nominal GDP growth is 5% and outstanding nominal government debt is 1500. b. Real GDP is 20,000 and stays constant, nominal GDP is initially 30,000, inflation is 4% and the debt/GDP ratio is 1.2

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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