Suppose that for the nation of Calliope, the debt-to-GDP ratio is 325%, the average annual growth rate is 1.1%, the average inflation rate is 0.5%, and the average nominal interest rate is 2.2%
Based on this information, determine if fiscal policy is sustainable in Calliope, and if not, what the primary budget deficit would have to be to make fiscal policy sustainable.
The real interest rate = 2.2 - 0.5 = 1.7%. Since the real interest rate is greater than the growth rate, Calliope's fiscal policy is not sustainable.
The primary deficit needed to sustain the debt + (the real interest rate - the growth rate)(debt-to-GDP ratio = 0
0 = PDt/PtYt + (0.017 - 0.011 )(3.25 )
0 = PDt/PtYt + 0.0195
PDt/PtYt = -0.0195, or -1.95%
This means that Calliope would have to run a primary surplus of 1.95% of GDP to make fiscal policy sustainable.
You might also like to view...
Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?
A) The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the marginal revenue curve of a perfectly competitive firm lies above its demand curve. B) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve. C) The monopolistically competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a perfectly competitive firm lies below its demand curve. D) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies above its demand curve.
How do RBC economists face the business cycle fact that inflation is procyclical?
A) They argue that even though inflation doesn't fit their theory, everything else does, and inflation is not important. B) They note that inflation would not be procyclical if monetary policy were conducted properly. C) They argue that inflation is procyclical only because monetary policy shocks are the main cause of business cycles. D) They use alternative statistical methods that suggest that inflation is countercyclical.
In game theory, the strategy that always yields the highest benefit for the player using it is the
A) dominant strategy. B) cooperative strategy. C) prisoners' strategy. D) matrix strategy.
Producing at a point inside the production possibilities curve
A. Is feasible when the nation is at war but not feasible when the nation is at peace. B. Suggests we are forgoing the ability to produce more of both goods. C. Is unattainable given the present level of technology. D. Means society must be using its resources efficiently.