At the Beginning of Year One,there Is No Government Debt

question 13

Essay

At the beginning of year one,there is no government debt outstanding.The government runs a $100 billion deficit in year one.Interest at a nominal rate of 10% must be paid starting in year two.Assume nominal GDP in year one is $2000 billion and the nominal growth rate of GDP is 4%.Assume the government balances its primary budget in the future and the interest rate and growth rate do not change.
(a)What will be the government deficit in years two,three,four,and five?
(b)What will be the value of government bonds outstanding at the end of the fifth year?
(c)What will be the debt-GDP ratio at the end of year five?

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Definitions:

Government Spending

Expenditures by government entities on goods and services, including infrastructure, public services, and social welfare programs.

GDP

Totaling the market value of all final goods and services produced inside a country within a set period results in the Gross Domestic Product.

Inflations

The speed at which the overall price level of goods and services increases, leading to a decrease in buying power.

Taxes

Compulsory financial charges imposed by a government on individuals or entities to fund public expenditures.