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Fill in the blanks in the table
Fill in the blanks in the table. Debt/GDP f= 5% r= 2% Interest/GDP Year Debt GDP (Y) b Deficit Interest i 0 $5,000 $10,000 50.0% $500.0 $100.0 1.00% 1 % $ $ % 2 % $ $ % With g = 4% and f= 5%, eventually debt will be % of GDP because of formula b* = ! ; with r=2%, gov interest payments on its debt will be % of GDP because i* =r
Expert Solution
| g=4% | debt/gdp | f=5% | r=2% | interest/gdp | ||
| YEAR | DEBT | GDP | b | DEFICIT | INTEREST | i |
| 0 | 5000 | 10000 | 50% | 500 | 100 | 1% |
| 1 | 5500 | 10400 | 52.9% | 520 | 110 | 1.06% |
| 2 | 6020 | 10816 | 55.7% | 540.8 | 120.4 | 1.11% |
In the above table:
Deficit of the past year is added to the debt of the current year. so deficit of year 0 was added to the debt of year 0 and hence the debt in year 1 was 5500.
GDP is growing at 4% every year. Deficit is 5% of each year which means:
year o deficit= 10000*5% = 500
year 1 deficit = 10400*5% = 520 and so on.
Interest in calculated on Debt each year.
Eventually Debt will be 100% of GDP because debt is growing at a fasters rate than GDP. [b = Debt/ gdp]
As the debt is equal to GDP, interest rate will be 2% of GDP because i = r*debt/GDP [Debt = GDP]
i = r.
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