Chapter 13, Problem 11P

To determine

Concept Introduction:

Gross Domestic Product (GDP): It refers to the gross money value or gross market value of all the finished goods and the services produced by the normal resident and nonresident people of the country that is within that particular within the borders of the country in an accounting year.

Formula to calculate debt percent of real GDP,

Formula to calculate budget deficit percent of real GDP,

Answer to Problem 11P

a. Government budget deficit remains constant.

Year	Real GDP(billions $)	Debt(billions $)	Budget Deficit(billions $)	Debt % of Real GDP(%)	Budget Deficit% of Real GDP(%)
2016	1,000	300	30	30	3
2017	1,030	309	30	30	2.91
2018	1,061	318.3	30	30	2.82
2019	1,093	328	30	30	2.74
2020	1,126	337	30	30	2.66
2021	1,159	347.7	30	30	2.58
`2022	1,194	358.2	30	30	2.51
2023	1,230	369	30	30	2.43
2024	1,267	380	30	30	2.36
2025	1,305	391.5	30	30	2.29
2026	1,344	403.2	30	30	2.23

b. Government budget deficit grows by 3%.

Year	Real GDP(billions $)	Debt(billions $)	Budget Deficit(billions $)	Debt % of Real GDP(%)	Budget Deficit% of Real GDP(%)
2016	1,000	300	30	30	3
2017	1,030	309	30.9	30	3
2018	1,061	318.3	31.8	30	2.99
2019	1,093	328	32.7	30	2.99
2020	1,126	337	33.6	30	2.98
2021	1,159	347.7	34.6	30	2.98
`2022	1,194	358.2	35.6	30	2.98
2023	1,230	369	36.6	30	2.97
2024	1,267	380	37.6	30	2.96
2025	1,305	391.5	38.7	30	2.96
2026	1,344	403.2	39.8	30	2.96

c. Government budget deficit grows by 20%.

Year	Real GDP(billions $)	Debt(billions $)	Budget Deficit(billions $)	Debt % of Real GDP(%)	Budget Deficit% of Real GDP(%)
2014	1,000	300	30	30	3
2015	1,030	309	36	30	3.49
2016	1,061	318.3	43.2	30	4.07
2017	1,093	328	51.8	30	4.73
2018	1,126	337	62.2	30	5.52
2019	1,159	347.7	74.6	30	6.43
2020	1,194	358.2	89.6	30	7.50
2021	1,230	369	107.5	30	8.73
2022	1,267	380	128.9	30	10.17
2023	1,305	391.5	154.7	30	11.85
2024	1,344	403.2	185.7	30	13.81

d. Debt-GDP ratio.

Debt-GDP ratio remains same in every case.

Explanation of Solution

• In part a, the budget deficit is constant so the debt-GDP ratio is 0.3 and deficit to GDP ratio is 0.03.

• In part b, the budget deficit increases by 3% so the debt-GDP ratio is 0.3 and in part c. the budget deficit increases by 20% so the debt-GDP ratio is 0.3.