Explore BrainMass

Measuring Inflation - Balanced Budget

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Guatemala government has an outstanding debt of $18.23 billion and its GDP is 30% higher than the debt.  The nominal interest rate is 5%.  The inflation rate is 2%.  
a. What   is   the   sustainable   deficit   ratio   if   the   country   is   growing   at   5%?   How  about  when inflation goes to â?2%?  

b.What  about  if  the  country  grows  at  2%?  How  about  when  inflation  goes  to  â?7%?  

c. Is Guatemala's debt sustainable if the government runs a balanced budget in both a and b.

© BrainMass Inc. brainmass.com October 17, 2018, 2:10 am ad1c9bdddf

Solution Preview

For these problems we can use the government budget equation, bt = d + (1+i )/ (1+n) bt-1, where b is the ratio of debt to GDP, d is the ratio of deficit to GDP, i is the nominal interest rate and n is the growth rate of GDP. bt is the debt ratio for the current period, and bt-1 is for the prior period. At the steady state value of b, we find that bt = bt-1 (debt is not changing).

Solving for steady-state value of b an inserting ...

Solution Summary

Guatemala's debt and calculation of sustainable deficit levels.

Similar Posting

Inflation, Budget Constraint, Unemployment Rate

Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. "In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all." Do you agree? Why or why not? Explain: "Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero."

Briefly explain how the following would shift the IS function to the right:A change to lump-sum taxation (Specify whether increase or decrease is needed to shift IS curve to the right.), A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.)

Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.
b.MD (money demand).
c.P (price index).

Suppose that private sector spending is highly sensitive to a change in interest rate. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering real GDP

Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal.

View Full Posting Details