Assume that at the end of 2021, the US government will have a 30 trillion (i.e. 30,000bn) dollars of existing debt. Also assume that the nominal interest rate is 7% and the inflation rate is 6%. (i) In 2022, the government decides to stabilize the debt (at 30 trillion USD). Compute the size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (ii) Instead, now assume that the nominal rates will increase to 10% but the inflation remains unchanged. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iii) Finally, assume that the nominal rates will increase to 10% but the inflation will fall to 3%. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iv) If the government decides to stabilize the debt in 2022 under these three different macroeconomic conditions (i)-(iii), which will be the easiest and which will be the most difficult? (Explain in words why)

Assume that at the end of 2021, the US government will have a 30 trillion (i.e. 30,000bn) dollars of existing debt. Also assume that the nominal interest rate is 7% and the inflation rate is 6%. (i) In 2022, the government decides to stabilize the debt (at 30 trillion USD). Compute the size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (ii) Instead, now assume that the nominal rates will increase to 10% but the inflation remains unchanged. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iii) Finally, assume that the nominal rates will increase to 10% but the inflation will fall to 3%. Compute the new size of a primary surplus that the government must run to achieve debt stabilization. (Express in billion USD) (iv) If the government decides to stabilize the debt in 2022 under these three different macroeconomic conditions (i)-(iii), which will be the easiest and which will be the most difficult? (Explain in words why)

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter31: The Impacts Of Government Borrowing

Section: Chapter Questions

Problem 7RQ: Based on the national saving and investment identity, what are the three ways the macroeconomy might...

See similar textbooks

Similar questions

Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and government debt at the beginning of the year equals $4 trillion. By how much is the government budget deficit overstated as a result of inflation? A) $0.12 trillion B) $0.32 trillion C) $0.44 trillion D) $0.80 trillion
One objection to deficit spending is that it increases the demand for loanable funds thereby putting upward pressure on interest rates that crowds out private investment spending thereby lowering future U.S. growth. (1) What is the general level of interest rates in 2020?
Suppose the national debt of a country is currently $400 billion dollar and the national nominal deficit for the country is $50 billion. Inflation rate has been 5%. What is the real deficit? Suppose that part of the $50 billion deficit came from the government buying $ 10 billion of natural resources to store for future use. What would the nominal deficit be under capital budgeting? 8) a) b)
(i) Using IS/LM diagram explain the likely effects of a fiscal expansion financed by government borrowing on both the domestic interest rate and the level of economic activity. (ii) Briefly explain what the national debt is and why keeping the national debt down as a percentage of GDP can be a good thing.
Homework - Please give explaination for correct option. The US national debt is approximately $23.2 trillion or 23, 200 billion in October 2019. If it were to be paid off in the year 2059 at 4% interest, what would be approximate annual payment? Note that the B stands for billions of dollars. a)$1,200B. b)$1,100B. C)$1,000B. D)$900B
What are some fiscal policies that might improve a society's human capital? (3pts) How would you expect larger budget deficits to affect a private sector investment in physical capital? (2pts) Why? (3pts)
A- Suppose potential GDP is $20 trillion. If the economy produces at potential, then the government budget deficit is $1 trillion. If actual GDP is $19 trillion, the government deficit is $1.25 trillion. The cyclically adjusted budget deficit is ___ trillion (do not enter a ‘$’ sign Assume an interest rate of 5%. What is the maximum amount an individual would be willing to give up today in exchange for $1, paid 30 years in the future? Suppose the government has promised to pay $100 billion dollars in benefits 10 years from now. Assuming an interest rate of 4%, what is the present discounted value (PDV) of the obligation? Answer in billions of dollars, rounded to two decimal places.
(b) Malaysia's fiscal deficit to rise to level seen during global financial crisis KUALA LUMPUR - Malaysia's fiscal deficit for 2021 should hit a level similar to that seen during the global financial crisis more than a decade ago, according to the government's first-ever pre-budget statement. Released on Tuesday (Aug 31), the country's Independence Day, the pre-budget statement showed the fiscal deficit reaching between 6.5 per cent and 7 per cent for 2021, higher than the 5.4 per cent initially estimated. The deficit reached 6.7 per cent during the 2008-2009 global financial crisis. Malaysia's economy has been battered since a budget projection was first made late last year, with the country beset by surging Covid-19 infections and repeated lockdowns for much of the year. Analyze the impact of the government budget deficit on Malaysia's open economy. Include a three-panel diagram, the market for loanable funds, net capital outflow and the market for foreign currency exchange to…
Find a fiscal deficit if the primary deficit is 780 and the interest payment are 630!
the nominal federal budget deficit in the US is about $1.7 trillion and outstanding debt is about $33 trillion. What is the real deficit if the inflation rate is 4%? a) 3 trillion b) -0.4 trillion c) 0.4 trillion d) none of the above
Find interest payments if :- Primary deficit = $23,000 Fiscal deficit = $31,000
Question 73 Assume a government starts with zero debt. This government then runs an annual deficit for 29 years of $4,511. At the end of those 29 years, what would be amount of the government debt? Please round to 2 decimal places if needed. Be sure to include a negative sign (-) if it is a decrease and do not include a dollar sign ($) when answering.