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Suppose in a country the real growth rate is 4% and the real interest rate is 6%.

(a) find out the constant debt-GDP ratio that the country can achieve if the country runs a primary budget deficit of 3%. Is this debt-GDP ratio stable, i.e., if the debt changes slightly the debt- GDP ratio gravitates towards this constant ratio or the debt- ratio increases or decreases without a limit? describe using appropriate calculations and a graph.
(b) Now suppose the country runs an austerity program and begins to maintain a primary surplus of 2%. find out the constant debt-GDP ratio that the country can achieve. Is this debt-GDP ratio stable? describe using appropriate calculations and a graph.
(ii) Now suppose the country follows an expansionary monetary policy that lowers the real interest to 2%, while real growth rate remains at 4%.
(c) find out the constant debt-GDP ratio that the country can achieve if the country runs a primary budget deficit of 3%. Is this debt-GDP ratio stable? describe using appropriate calculations and a graph.
(d) Now suppose the country begins to maintain a primary surplus of 2% after pursuing a stringent fiscal policy. Now, find out the constant debt- GDP ratio that the country can achieve. Is this debt-GDP ratio stable? describe using appropriate calculations and a graph.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M940173

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