Macroeconomics Case: Debts, Deficits, Interest Rates & Inflation

[veedee]

Dear All,

Please help me to answer below question:

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Consider an economy characterized by the following facts:
The debt to GDP ratio is 100%
The official budget deficit is 4% of GDP
The nominal interest rate is 10%
The inflation rate is 7%

1. What is the primary deficit / surplus ratio to GDP?
2. What is the inflation adjusted deficit / surplus ratio to GDP?
3. Suppose that output is 2% below its natural level. What is the cyclically adjusted, inflation adjusted deficit / surplus ratio to GDP?
4. Suppose instead that output begins at its natural level and that output growth remains constant at the normal rate of 2%. How will the debt to GDP ratio change over time?

Thank you very much for your help.

 

[MarkFL]

Hello and welcome to MHB, veedee! :D

We ask that people posting questions show what they have done so far so that our helpers will have a better idea where you are stuck and/or where you may be going wrong.

Can you post your work so far?

 

[veedee]

Hello and welcome to MHB, veedee! :D

We ask that people posting questions show what they have done so far so that our helpers will have a better idea where you are stuck and/or where you may be going wrong.

Can you post your work so far?

Hello MarkFL,

1.
2. The inflation adjusted surplus ratio to GDP is 10% or 0.1
3.
4.

Thank you very much.

 

[MarkFL]

It has been over 20 years since I took macroeconomics, and all I remember is that it is full of definitions.

We are given:

[box=blue]The debt to GDP ratio is 100%
The official budget deficit is 4% of GDP
The nominal interest rate is 10%
The inflation rate is 7%[/box]

So, let's begin with how your textbook defines "primary deficit/surplus" in terms of the given information...

 

[veedee]

It has been over 20 years since I took macroeconomics, and all I remember is that it is full of definitions.

We are given:

[box=blue]The debt to GDP ratio is 100%
The official budget deficit is 4% of GDP
The nominal interest rate is 10%
The inflation rate is 7%[/box]

So, let's begin with how your textbook defines "primary deficit/surplus" in terms of the given information...

Hello MarkFL,

The primary deficit is defined as the value of government expenditures plus transfer payments minus government revenues.

The primary surplus means that tax revenues exceed program spending.

Thanks.

 

[MarkFL]

Okay, you have introduced 3 new values:

• government expenditures
• transfer payments
• government revenues.

Can we find these values from the given information? How are they defined?

 

[veedee]

Okay, you have introduced 3 new values:

• government expenditures
• transfer payments
• government revenues.

Can we find these values from the given information? How are they defined?

Government expenditure includes all government consumption, investment, and transfer payments.

Government revenue is money received by a government. It is an important tool of the fiscal policy of the government and is the opposite factor of government expenditure.

Thanks.

 

[MarkFL]

What we need are the unknown quantities in terms of the given information. :D

 

[veedee]

What we need are the unknown quantities in terms of the given information. :D

Hello MarkFL,

Do you have the formula to get the unknown quantities?

 

[MarkFL]

Hello MarkFL,

Do you have the formula to get the unknown quantities?

No, as I said it has been a long time since I took macroeconomics. What I am wanting you to do is, for example you give:

"The primary deficit is defined as the value of government expenditures plus transfer payments minus government revenues."

You need to look in your textbook for definitions of these 3 values (government expenditures, transfer payments, government revenues) in terms of the given information. Next, you gave:

"Government expenditure includes all government consumption, investment, and transfer payments."

These don't really help us. To answer the first question, we need the "primary deficit/surplus ratio to GDP" in terms of what is given:

[box=blue]The debt to GDP ratio is 100%
The official budget deficit is 4% of GDP
The nominal interest rate is 10%
The inflation rate is 7%[/box]

So, you need to first find a formula for "primary deficit/surplus ratio to GDP" and then take the terms given in the formula, and relate them through other formulas to the given information.

 

[veedee]

Hello MarkFL,

Thanks for your advice.