1.12. In 2008, the policy makers of the economy of Eastlandia projected the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy for the next 10 years under different scenarios for growth in the government’s deficit. Real GDP is currently $1,000 billion per year and is expected to grow by 3% per year, the public debt is $300 billion at the beginning of the year, and the deficit is $30 billion in 2008.

a. Complete the accompanying table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit remains constant at $30 billion over the next 10 years. (Remember that the government’s debt will grow by the previous year’s deficit.)

b. Redo the table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 3% per year over the next 10 years.

c. Redo the table again to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 20% per year over the next 10 years.

d. What happens to the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy over time under the three different scenarios?

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Budget Real Budget Debt deficit GDP Debt deficit (percent (percent (billions (billions (billions of of of of of real real Year dollars) dollars) dollars) GDP) GDP) 2008 $1,000 $300 $30 ? ? 2009 1,030 ? ? ? ? 2010 1,061 ? 2011 1,093 2012 1,126 2013 1,159 ? 2014 1,194 ? 2015 1,230 ? 2016 1,267 ? ?? ?? ??? ?? ?? ??? ? ? ? ? ? ? ? ? 2017 1,305 ? ? ? 2018 1,344 ? 3. ? ? 222. ? ? ? ? ? ?