Consider an economy characterized by the following facts: i. The official budget deficit is (4 %) of
Question:
Consider an economy characterized by the following facts:
i. The official budget deficit is \(4 \%\) of GDP.
ii. The debt-to-GDP ratio is \(100 \%\).
iii. The nominal interest rate is \(10 \%\).
iv. The inflation rate is \(7 \%\).
a. What is the primary deficit/surplus ratio to GDP?
b. What is the inflation-adjusted deficit/surplus ratio to GDP? There is a "rule-of-thumb" in the chapter to understand how the actual deficit changes when output falls below its natural level.
c. Suppose that output is \(2 \%\) below its natural level. What is the cyclically adjusted, inflation-adjusted deficit/surplus ratio to GDP?
d. 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?
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