2. Calculating the debt to GDP ratioSuppose the following statistics characterize the financial health of the hypothetical economy Debtenburg at the end of 2017:• Gross domestic product (GDP) is equal to $150 billion.• The national debt is equal to $180 billion.• The government has a budget deficit of $9 billion.• The debt ceiling in Debtenburg is set at $198 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 $150 billion in 2018, and again the government runs a budget deficit of $9 billion. For simplicity, assume theinterest 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.Year20172018GDPNational Del(Billions of dollars) (Billions of dollars) Ratio of National Debt to GDP150180150Now that the government's national debt has been growing for several years, investors have become worried that the government might default on itsdebt-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 aninterest rate of 10%.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 Debtenburg will exceed the legal limit on how much it can borrow.Truebillion.False

Gross domestic product (GDP) refers to the total output produced in an economy in a given fiscal…

alculating the debt to GDP ratio Suppose the following statistics characterize the financial health of the hypothetical economy Debtenburg at the end of 2017: • Gross domestic product (GDP) is equal to $150 billion. • The national debt is equal to $180 billion. • The government has a budget deficit of $9 billion. • The debt ceiling in Debtenburg is set at $198 billion. The following calculations help you see how the ratio of debt to GDP changes from one year to the next.

alculating the debt to GDP ratio Suppose the following statistics characterize the financial health of the hypothetical economy Debtenburg at the end of 2017: • Gross domestic product (GDP) is equal to $150 billion. • The national debt is equal to $180 billion. • The government has a budget deficit of $9 billion. • The debt ceiling in Debtenburg is set at $198 billion. The following calculations help you see how the ratio of debt to GDP changes from one year to the next.

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

Problem 38CTQ: Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending...

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Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?
Why is government spending typically measured as a percentage of GDP rather than in nominal dollars?
Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?
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…
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…
Calculating the debt to GDP ratio Suppose the following statistics characterize the financial health of the hypothetical economy Debtenburg at the end of 2017: • Gross domestic product (GDP) is equal to $180 billion. • The national debt is equal to $234 billion. • The government has a budget deficit of $9 billion. • The debt ceiling in Debtenburg is set at $253 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 $180 billion in 2018, and again the government runs a budget deficit of $9 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 GDP National Debt Ratio…
2. Calculating the debt to GDP ratio The following calculations help you see how the ratio of debt to GDP changes from one year to the next. Suppose that in a hypothetical country with a currency called the ducat, debt is equal to 140 trillion ducats and GDP is equal to 100 trillion ducats. This means that the ratio of debt to GDP is 1.4, or 140%. Also, suppose that the deficit is 7 trillion ducats, which is 7% of GDP. Aa Aa When the government runs a deficit, it spends more than it collects in tax revenue. To make up the difference, it borrows. So if it runs a deficit of 7 trillion ducats, debt increases by 7 trillion ducats. So debt next year is 147 trillion ducats. Suppose that there is no growth in real GDP and inflation is equal to -2% per year. (Negative inflation is the same as deflation.) Next year's GDP will be equal to trillion ducats. If the ratio of debt to GDP is 1.4 this year, the ratio of debt to GDP next year when inflation is equal to -2% per year will be Suppose that…
2. calculating the debt to GDP ratio
Consider the following economy below in 2010 and 2020. What is the debt-to-GDP ratio in 2020? Year 2010 2020 Nominal Debt 1000 2500 Nominal GDP 4000 8000 Price Level/GDP Deflator 100 150 Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a 0.17 b 0.25 0.31 d 0.63
Price level (GDP deflator, 2000 - 100) LRAS SRAS Real GDP (trillions of 2000 dollars) In the figure above, if the economy is at point A, the appropriate fiscal policy by the US Congress and the President would be to raise income taxes. O raise interest rates lower interest rates O lower income taxes
Use the following equations for exercises 16–18. C= $100+.8Y I= $200 G= $250 X = $100.2Y
6. Graphical treatment of taxes and fiscal policy The main difference between variable taxes and fixed taxes is that unlike fixed taxes, variable taxes do not vary with GDP The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a tax increase through a fixed tax. Use two green points (triangle symbol) to connect the two black points (plus symbols) representing the consumption schedule after the change in taxes. Hint: The new consumption schedule must pass through one point on the left and one point on the right. Hint: The new consumption schedule must pass through one point on the left and one point on the right. 50 Consumption with Tax Increase through a Fixed Tax Consumption with Tax Increase through a Variable Tax + 20 40 60 80 100 REAL GDP (Billions of dollars) The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure. Use the new…