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Unformatted text preview: (a) Suppose that nominal GDP is $1 billion and the government has $100 million of bonds outstanding. The bonds are one-year bonds that pay a 7% nominal interest rate. The growth rate of nominal GDP is 5% per year. Beginning now the government runs a zero primary de&cit forever and pays interest on its existing debt by issuing new bonds. What is the current debt-GDP ratio? What will this ratio be after 1 , 2 , 5 , and 10 years? Suppose that, if the debt-GDP ratio exceeds 10 , the public refuses to buy additional government bonds. Will the debt-GDP ratio ever reach that level? Will the government someday have to run a primary surplus to repay its debts, or can it avoid repayment forever? Why? (b) Repeat Part ( a ) for nominal GDP growth of 8% per year and a nominal interest rate on government bonds of 7% per year. 1...
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This note was uploaded on 03/10/2010 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).
- Spring '07