Calculate the constant debt-gdp ratio

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Reference no: EM135526

Suppose in a country the real growth rate is 4% and the real interest rate is 6%.

(a) Calculate the constant debt-GDP ratio that the country can achieve if the country runs a primary budget deficit of 3%. Is this debt-GDP ratio stable, i.e., if the debt changes slightly the debt- GDP ratio gravitates towards this constant ratio or the debt- ratio increases or decreases without a limit? Explain using appropriate calculations and a graph.

(b) Now suppose the country runs an austerity program and begins to maintain a primary surplus of 2%. Calculate the constant debt-GDP ratio that the country can achieve. Is this debt-GDP ratio stable? Explain using appropriate calculations and a graph.
(ii) Now suppose the country follows an expansionary monetary policy that lowers the real interest to 2%, while real growth rate remains at 4%.

(c) Calculate the constant debt-GDP ratio that the country can achieve if the country runs a primary budget deficit of 3%. Is this debt-GDP ratio stable? Explain using appropriate calculations and a graph.

(d) Now suppose the country begins to maintain a primary surplus of 2% after pursuing a stringent fiscal policy. Now, calculate the constant debt- GDP ratio that the country can achieve. Is this debt-GDP ratio stable? Explain using appropriate calculations and a graph.

Reference no: EM135526

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