You are an economist at the finance ministry of Asiaca, and your supervisor is asking you...

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You are an economist at the finance ministry of Asiaca, and your supervisor is asking you to work on the country's stock of debt to GDP ratio, as borrowings have increased dramatically due to lockdowns during the COVID-19 pandemic. You have been presented with information for 2020 (time period t) and 2019 (time period t-1) as follows: Expenditure for purchase of goods and services (G) in 2020 Average tax rate (T) in 2020 Value of GDP in 2020 Risk free interest rate Risk premium interest rate Growth rate of GDP in 2020 t Stock of Debt outstanding in 2019 Value of GDP in 2019 $60 bn 30% of GDP $100 bn 1.5% 4% 4% $20 bn $80 bn (a) Your supervisor wants to know what the stock to GDP ratio for the year 2020 (time period t) is. Present your answer showing the equation used (and explain what the equation means), workings and summarise your findings. (6 marks) (b) Your supervisor is greatly concerned that the accumulation of debt will continue for the next few years and that this will pose significant concerns to future generations who would have to pay the bulk of this accumulated debt while the current generation can enjoy a higher standard of living. You disagree with his assertion. How can this be so? Explain your reasoning and include a numerical example. (4 marks) You are an economist at the finance ministry of Asiaca, and your supervisor is asking you to work on the country's stock of debt to GDP ratio, as borrowings have increased dramatically due to lockdowns during the COVID-19 pandemic. You have been presented with information for 2020 (time period t) and 2019 (time period t-1) as follows: Expenditure for purchase of goods and services (G) in 2020 Average tax rate (T) in 2020 Value of GDP in 2020 Risk free interest rate Risk premium interest rate Growth rate of GDP in 2020 t Stock of Debt outstanding in 2019 Value of GDP in 2019 $60 bn 30% of GDP $100 bn 1.5% 4% 4% $20 bn $80 bn (a) Your supervisor wants to know what the stock to GDP ratio for the year 2020 (time period t) is. Present your answer showing the equation used (and explain what the equation means), workings and summarise your findings. (6 marks) (b) Your supervisor is greatly concerned that the accumulation of debt will continue for the next few years and that this will pose significant concerns to future generations who would have to pay the bulk of this accumulated debt while the current generation can enjoy a higher standard of living. You disagree with his assertion. How can this be so? Explain your reasoning and include a numerical example. (4 marks)

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