Question 16

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Suppose an economy has a GDP of $40 billion and a national debt of $20 billion, and the average interest rate on this debt is currently 3%.

Correct! Interest payments are calculated by multiplying the interest rate by the dollar value of the debt. In this case, 3% times $20 billion = 0.03 x $20,000 million = $600 million.

To find the percentage this is of the GDP, divide the annual interest payment by the GDP. In this example, $600 million divided by $40 billion is 0.015, or 1.5%.

To find the percentage this is of the GDP, divide the annual interest payment by the GDP. In this example, $600 million divided by $40 billion is 0.015, or 1.5%.

Incorrect! Interest payments are calculated by multiplying the interest rate by the dollar value of the debt. In this case, 3% times $20 billion = 0.03 x $20,000 million = $600 million.

To find the percentage this is of the GDP, divide the annual interest payment by the GDP. In this example, $600 million divided by $40 billion is 0.015, or 1.5%.

To find the percentage this is of the GDP, divide the annual interest payment by the GDP. In this example, $600 million divided by $40 billion is 0.015, or 1.5%.

Correct! Under event (1), interest payments would be $720 million (3% x $24 billion). This is equal to 1.8% of the economy’s GDP ($720 million divided by $40 billion). Under event (2), interest payments would be $800 million (4% x $20 billion). This is equal to 2% of its GDP ($800 million divided by $40 billion).

Thus, the interest rate increase described as event (2) causes a greater interest payment burden, both in terms of dollars and as a percentage of the GDP.

Thus, the interest rate increase described as event (2) causes a greater interest payment burden, both in terms of dollars and as a percentage of the GDP.

Incorrect! Under event (1), interest payments would be $720 million (3% x $24 billion). This is equal to 1.8% of the economy’s GDP ($720 million divided by $40 billion). Under event (2), interest payments would be $800 million (4% x $20 billion). This is equal to 2% of its GDP ($800 million divided by $40 billion).

Thus, the interest rate increase described as event (2) causes a greater interest payment burden, both in terms of dollars and as a percentage of the GDP.

Thus, the interest rate increase described as event (2) causes a greater interest payment burden, both in terms of dollars and as a percentage of the GDP.