te ack ing back to its old level of spending and taxes. Second. given that the e
ID: 1127740 • Letter: T
Question
te ack ing back to its old level of spending and taxes. Second. given that the evidence supports the Ricardian equivalence proposition, the defict will stimulate the economy during wartime, helping to keep the unemployment rate low. at spend. statement correct? l govern- Consider an economy characterized by the following figures ns in the Identify the mistakes in this statement. Is anything in this 3. High debt in a low-level context (close to the Japanese economy situation in 2013) Deficit: 7.8 % Net Debt: 123%GNP e burden Inflation: 0.4% Interest: 0.25% a. What is the primary deficit/surplus ratio to GDP? b. What is the inflation-adjusted deficit/surplus ratio to action to GDP? C. Suppose that output is 2% below its natural level, what in income is the cyclically adjusted, inflation-adjusted deficit/surplus overnment ratio to GDP d. Suppose instead that output begins at its natural level and r than the that output growth remains constant at the normal rate of 2%. Ignoring any effect of output on tax revenue, that er than the is, assuming a primary deficit of 7.5% forever, how many t policy, a (4.) government with a deficit of 3% issues bonds for the deficit an 30% per ave no effect a. What is the amount of money creation? years will it take for the debt-to-GDP ratio fall under 60%? amount and asks the central bank to buy the bonds. GDP (M) is equal to 0.5 and the rate of inflation is 3%. Assuming the average ratio of central bank money to monthly b. What is the amount of seignorage? c. If the central bank money to monthly GDP is equal to 1. he deficit an go right deficit is 10% of GDP and inflation is 8%,what are the val- ues derived in parts (a) and (b)?Explanation / Answer
GDP and GNP differs by Net Factor Payments from Abroad, since it is not mentioned it can be assumned to zero.
Given the 0.4% Nominal interst rate, the primary deficit is calcualted at 0.4 - 7.8 = - 7.4%
Real interst rates are nomial interst rates minus inflation, which is 0.4 - 0.25 = 0.15
0.15*100% = 15% of GDP
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