Exercise 8 The relation of foreign debt/GDP of country Indebted is 60%, given that the greatest part is sovereign debt (i.e., it represents government obligations with foreign investors). Given that the foreign investors are concerned about a possible default by the Indebted government, the interest rate on the debt is 10%. Assume that product growth for Indebted is only 1% and that the capital-account balance is equal to zero.

a. Compute the current-account balance Indebted needs to maintain the debt/GDP ratio constant.

b. The deficit in current account for Indebted is 6.8% of GDP. Calculate the lack in current resources and interpret the result.