Suppose the following statistics characterize the financial health of the hypothetical economy Spendia at the end of 2017: • Gross domestic product (GDP) is equal to $100 billion. • The national debt is equal to $130 billion. • The government has a budget deficit of $7 billion. • The debt ceiling in Spendia is set at $148 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 $100 billion in 2018, and again the government runs a budget deficit of $7 billion. For simplicity, assume the nterest 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 100 130 2018 100 low that the government's national debt has been growing for several years, investors have become worried that the government might default on its lebt-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 terest rate of 20%. f the government runs a budget deficit of $10 billion in 2019, the national debt will increase by S rue or False: At the end of 2019, the government of Spendia 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 Spendia at the end of 2017: • Gross domestic product (GDP) is equal to $100 billion. • The national debt is equal to $130 billion. • The government has a budget deficit of $7 billion. • The debt ceiling in Spendia is set at $148 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 $100 billion in 2018, and again the government runs a budget deficit of $7 billion. For simplicity, assume the nterest 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 100 130 2018 100 low that the government's national debt has been growing for several years, investors have become worried that the government might default on its lebt-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 terest rate of 20%. f the government runs a budget deficit of $10 billion in 2019, the national debt will increase by S rue or False: At the end of 2019, the government of Spendia will exceed the legal limit on how much it can borrow. True billion. False
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter30: Government Budgets And Fiscal Policy
Section: Chapter Questions
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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 Spendia at the end of 2017:
• Gross domestic product (GDP) is equal to $100 billion.
• The national debt is equal to $130 billion.
• The government has a budget deficit of $7 billion.
• The debt ceiling in Spendia is set at $148 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 $100 billion in 2018, and again the government runs a budget deficit of $7 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.
Year
2017
2018
GDP
National Debt
(Billions of dollars) (Billions of dollars) Ratio of National Debt to GDP
100
130
100
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 Spendia will exceed the legal limit on how much it can borrow.
True
billion.
O False
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