Question 17.22

11. In 2014, the policy makers of the economy of Eastlandia projected the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy for the next 10 years under different scenarios for growth in the government’s deficit. Real GDP is currently $1,000 billion per year and is expected to grow by 3% per year, the public debt is $300 billion at the beginning of the year, and the deficit is $30 billion in 2014.

Year Real
GDP
(billions
of
dollars)		 Debt
(billions
of
dollars)		 Budget
deficit
(billions
of
dollars)		 Debt
(percent
of real
GDP)		 Budget
deficit
(percent
of real
GDP)
2014 $1,000 $300 $30 ? ?
2015 1,030 ? ? ? ?
2016 1,061 ? ? ? ?
2017 1,093 ? ? ? ?
2018 1,126 ? ? ? ?
2019 1,159 ? ? ? ?
2020 1,194 ? ? ? ?
2021 1,230 ? ? ? ?
2022 1,267 ? ? ? ?
2023 1,305 ? ? ? ?
2024 1,344 ? ? ? ?

  1. Complete the accompanying table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit remains constant at $30 billion over the next 10 years. (Remember that the government’s debt will grow by the previous year’s deficit.)

  2. Redo the table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 3% per year over the next 10 years.

  3. Redo the table again to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 20% per year over the next 10 years.

  4. What happens to the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy over time under the three different scenarios?