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Suppose the following statistics characterize the financial health of the hypothetical economy Splurgium at the end of 2017: • Gross domestic product (GDP) is equal to $160 billion. • The national debt is equal to $240 billion. • The government has a budget deficit of $8 billion. • The debt ceiling in Splurgium is set at $264 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 $160 billion in 2018, and again the government runs a budget deficit of $8 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. GDP National Debt Year (Billions of dollars) (Billions of dollars) Ratio of National Debt to GDP 2017 160 240 2018 160 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 20%. If the government runs a budget deficit of $10 billion in 2019, the national debt will increase by True or False: At the end of 2019, the government of Splurgium will exceed the legal limit on how much it can borrow. True billion. False

Suppose the following statistics characterize the financial health of the hypothetical economy Splurgium at the end of 2017: • Gross domestic product (GDP) is equal to $160 billion. • The national debt is equal to $240 billion. • The government has a budget deficit of $8 billion. • The debt ceiling in Splurgium is set at $264 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 $160 billion in 2018, and again the government runs a budget deficit of $8 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. GDP National Debt Year (Billions of dollars) (Billions of dollars) Ratio of National Debt to GDP 2017 160 240 2018 160 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 20%. If the government runs a budget deficit of $10 billion in 2019, the national debt will increase by True or False: At the end of 2019, the government of Splurgium will exceed the legal limit on how much it can borrow. True billion. False

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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2. Calculating the debt to GDP ratio Suppose the following statistics characterize the financial health of the hypothetical economy Splurgium at the end of 2017: Gross domestic product (GDP) is equal to $160 billion. • The national debt is equal to $240 billion. • The government has a budget deficit of $8 billion. The debt ceiling in Splurgium is set at $264 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 $160 billion in 2018, and again the government runs a budget deficit of $8 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. GDP National Debt (Billions of dollars) (Billions of dollars) Ratio of National Debt to GDP 160 240 160 Year 2017 2018 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 20%. If the government runs a budget deficit of $10 billion in 2019, the national debt will increase by s True or False: At the end of 2019, the government of Splurgium will exceed the legal limit on how much it can borrow. True billion. False
Transcribed Image Text:2. Calculating the debt to GDP ratio Suppose the following statistics characterize the financial health of the hypothetical economy Splurgium at the end of 2017: Gross domestic product (GDP) is equal to $160 billion. • The national debt is equal to $240 billion. • The government has a budget deficit of $8 billion. The debt ceiling in Splurgium is set at $264 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 $160 billion in 2018, and again the government runs a budget deficit of $8 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. GDP National Debt (Billions of dollars) (Billions of dollars) Ratio of National Debt to GDP 160 240 160 Year 2017 2018 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 20%. If the government runs a budget deficit of $10 billion in 2019, the national debt will increase by s True or False: At the end of 2019, the government of Splurgium will exceed the legal limit on how much it can borrow. True billion. False
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