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Suppose a country has a national debt of $5,000 billion, a GDP of $10,000 billion, and a budget deficit of $100 billion
Suppose a country has a national debt of $5,000 billion, a GDP of $10,000 billion, and a budget deficit of $100 billion.
a. How much will its new national debt be?
b. Compute its debt-GDP ratio.
c. Suppose its GDP grows by 1% in the next year and the budget deficit is again $100 billion. Compute its new level of national debt and its new debt-GDP ratio.
Expert Solution
(a) Computation of New National Debt:
When national debt = $5,000 billion, a budget deficit of $100 billion will increase national debt by this amount.
New national debt = Existing national debt + Budget deficit = $(5,000 + 100) = $5,100 billion
(b) Computation of Debt-GDP Ratio:
Debt-GDP Ratio = Previous debt/GDP
= $5,000 billion / $10,000 billion
= 0.5 or 50%
(c) Computation of New Debt-GDP Ratio:
Debt-GDP Ratio = New Debt/GDP
= $5,100 billion / ($10,000*101%)billion
= $5100 billion/$10,100 billion
= 0.5050 or 50.50%
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