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
Chapter12: Federal Budgets And Public Policy
Section: Chapter Questions
Problem 3.8P
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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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