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You have been hired as a consultant by the government of a small, advanced economy with a low level of public debt equal to 30%
You have been hired as a consultant by the government of a small, advanced economy with a low level of public debt equal to 30% of GDP. Moreover, assume that real GDP is increasing at 3% per year and inflation is controlled at 2%. This government starts a massive public expenditure program, modernizing the national network of highways, ports, and airports by issuing public debt. What do you expect will happen with domestic interest rates, prices of non-tradable goods, and real exchange rates? What do you expect will happen with private investment? Would your previous answer change if the government increased taxes instead of using debt? Use the theories you learned in class and explain specific mechanisms/channels operating
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