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Problem 3: Government Debt Spirals [7 Points] Suppose that an economy begins in the year 2024. It owes $10,000 in outstanding government debt. This debt
Problem 3: Government Debt Spirals [7 Points] Suppose that an economy begins in the year 2024. It owes $10,000 in outstanding government debt. This debt is all owed at an annual interest rate of 5% per year. Suppose also that there is a tax rate of 10%, and a Real GDP of $10,000. Government Spending is currently $800. 11. What are (i) the primary budget deficit and (ii) the total budget deficit in this economy? What is this economy's Debt-to-GDP-ratio? [3 points] Now suppose that the government has to borrow more money at an interest rate of 5% per year to cover its budget deficit in 2024. This borrowing gets added to its debt for next year (2025). 12. Now considering 2025, what would be the new total budget deficit with the new level of debt? [2 points] Now suppose that National Income is also growing, and so GDP (Y) also grows at 5% per year. 13. What is GDP in 2025? What is the new Debt-to-GDP-ratio in 20257 [2 points]
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