The Chief Economist of the IMF is concerned about the fiscal situation of country A. The...
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The Chief Economist of the IMF is concerned about the fiscal situation of country A. The table below summarises the key data Stock of outstanding debt to GDP ratio in period t-1 Interest rate r in period t Rate of growth of nominal GDP Y in period t Tax revenues to GDP ratio in period t 2 0.08 0.03 0.5 You are asked to provide some analysis of the fiscal sustainability of this position: a) What level of government expenditure (excluding interest payment, in percent of GDP) should the government spend in period t to ensure that there is no further increase in the debt to GDP ratio? (1 mark) b) Assuming that the expenditure to GDP ratio in period t-1 was 0.5, what do you expect will happen to GDP in the short term if the government effectively sets the expenditure to GDP ratio you determined from point a (1 mark) c) The current interest rate on German government bonds is 0.01. Based on this information, what is the alternative advice you can provide to policy-makers of country A to ensure that there is no increase in the debt to GDP ratio? (1 mark) The Chief Economist of the IMF is concerned about the fiscal situation of country A. The table below summarises the key data Stock of outstanding debt to GDP ratio in period t-1 Interest rate r in period t Rate of growth of nominal GDP Y in period t Tax revenues to GDP ratio in period t 2 0.08 0.03 0.5 You are asked to provide some analysis of the fiscal sustainability of this position: a) What level of government expenditure (excluding interest payment, in percent of GDP) should the government spend in period t to ensure that there is no further increase in the debt to GDP ratio? (1 mark) b) Assuming that the expenditure to GDP ratio in period t-1 was 0.5, what do you expect will happen to GDP in the short term if the government effectively sets the expenditure to GDP ratio you determined from point a (1 mark) c) The current interest rate on German government bonds is 0.01. Based on this information, what is the alternative advice you can provide to policy-makers of country A to ensure that there is no increase in the debt to GDP ratio? (1 mark)
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a In order to ensure that there is no further increase in the debt to GDP ratio the government shoul... View the full answer
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Investments
ISBN: 978-0071338875
8th Canadian Edition
Authors: Zvi Bodie, Alex Kane, Alan Marcus, Stylianos Perrakis, Peter
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