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Unformatted text preview: DEPARTMENT OF ECONOMICS FALL 2009 UNIVERSITY OF CALIFORNIA, BERKELEY ECON 182 Problem Set 8 Due in class on Thursday, November 5 th at the beginning of lecture . Students that show their work and write neatly will be graded favorably. Please write your full name, GSI, and section time on your problem set. 1. The Sustainability of Public Debt This question asks you to explore the important issue of public debt sustainability, using an analogous framework developed in the lecture for current account sustainability. Define $B as total government debt in nominal terms, $PS the primary surplus in nominal terms and $FS the fiscal surplus in nominal terms. Note that $FS = $T - $G – i$B and $PS = $T - $G. Note also that $FS t = $B t+1- $B t . a). Derive the primary surplus (as a fraction of GDP) required to stabilize the ratio of public debt to GDP at its current level. (Hint: Think about the analogous quantities for the fiscal surplus and primary surplus in the international context.) b). Interpret the sustainability rule you found above. c). Obtain the most recent data on B/Y for the US and Japan (Hint: The Economist readings for this week is a good place to look!). Assuming a real interest rate of 5% and a real output growth rate of 2% for both countries, calculate the primary surplus/GDP ratios required to...
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This note was uploaded on 02/07/2010 for the course ECON 182 taught by Professor Kasa during the Spring '08 term at Berkeley.
- Spring '08