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(a) How does the time path of rD(t)/y(t) look like? (b) What is the steady-state value of rD(t)/y(t)? (c) Does it exceed one? Interpret your result.

(a) How does the time path of rD(t)/y(t) look like? (b) What is the steady-state value of rD(t)/y(t)? (c) Does it exceed one? Interpret your result.

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter30: Government Budgets And Fiscal Policy
Section: Chapter Questions
Problem 51P: A government starts off with a total debt of $3.5 billion. In year one, the government runs a...
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3. Can a government run persistent budget deficit? Can national debt grow forever without bankrupting the nation? Let D(t), y(t), and r be the amount of debt at year t, national income at year t, and interest rate on debt per-year, respectively, with D(0) = 0 and y(0) = 1. Here bankruptcy means whether the ratio of interest payment to national income will exceed one i.e. rD(t)/y(t) > 1 at some year. Suppose that time path of debt is given by D = by(t), b > 0 || and the time path of income is given by ģ = gy(t), g > 0. (a) How does the time path of rD(t)/y(t) look like? (b) What is the steady-state value of rD(t)/y(t)? (c) Does it exceed one? Interpret your result.
Transcribed Image Text:3. Can a government run persistent budget deficit? Can national debt grow forever without bankrupting the nation? Let D(t), y(t), and r be the amount of debt at year t, national income at year t, and interest rate on debt per-year, respectively, with D(0) = 0 and y(0) = 1. Here bankruptcy means whether the ratio of interest payment to national income will exceed one i.e. rD(t)/y(t) > 1 at some year. Suppose that time path of debt is given by D = by(t), b > 0 || and the time path of income is given by ģ = gy(t), g > 0. (a) How does the time path of rD(t)/y(t) look like? (b) What is the steady-state value of rD(t)/y(t)? (c) Does it exceed one? Interpret your result.
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