6. The government budget constraint under the assumption that the government controls the money supply is...

 

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6. The government budget constraint under the assumption that the government controls the money supply is given by: T+AB+AM=G+iB where T is tax revenue, AB is the change in public debt, AM is the change in the money supply, G is government spending and i is the nominal interest rate that the government must pay to borrow from financial markets. (a) Derive an expression for the debt-to-GDP ratio dynamics and an expression for the equilibrium debt-to-GDP ratio. Explain what determines whether the government is a debtor or a creditor in equilibrium. (b) Consider a country with GDP growth rate of 3% and real interest rate of 2%. If the government is seeking to meet the Maastricht criterion of a maximum debt-to-GDP ratio of 60%, what is the maximum budget deficit ratio that would allow the government to meet this objective? (e) Briefly discuss the Ricardian equivalence proposition and the counter arguments presented against this view of government debt. 6. The government budget constraint under the assumption that the government controls the money supply is given by: T+AB+AM=G+iB where T is tax revenue, AB is the change in public debt, AM is the change in the money supply, G is government spending and i is the nominal interest rate that the government must pay to borrow from financial markets. (a) Derive an expression for the debt-to-GDP ratio dynamics and an expression for the equilibrium debt-to-GDP ratio. Explain what determines whether the government is a debtor or a creditor in equilibrium. (b) Consider a country with GDP growth rate of 3% and real interest rate of 2%. If the government is seeking to meet the Maastricht criterion of a maximum debt-to-GDP ratio of 60%, what is the maximum budget deficit ratio that would allow the government to meet this objective? (e) Briefly discuss the Ricardian equivalence proposition and the counter arguments presented against this view of government debt.

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Answer Explanation a i The Debt to GDP ratio is a simple way of comparing a countrys economic output and its debt This is measured based on Gross Domestic Product GDP This shows the relationship betwe... View the full answer