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14 November, 16:59

Assume a country's nominal GDP is $600 billion, government expenditures less debt service are $145 billion, and revenue is $160 billion. The nominal debt is $360 billion. Inflation is 3 percent and interest rates are 6 percent.

a. Calculate debt service payments. b. Calculate the nominal deficit or surplus. Add a negative sign before the value to indicate a deficit. c. Calculate the real deficit or surplus, placing a negative sign in front of the value if it is a deficit.

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  1. 14 November, 20:46
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    a). Debt service payments=$21.6 billion

    b). The nominal deficit=$6.6 billion

    c). The government has a real budget surplus of $4.2 billion

    Explanation:

    a). Determine the debt service payments

    The debt service payments can be expressed as;

    Debt service payments=Nominal debt*interest rate

    where;

    nominal debt=$360 billion

    interest rate=6%=6/100=0.06

    replacing;

    Debt service payments=360*0.06=$21.6 billion

    Debt service payments=$21.6 billion

    b). Determine the nominal deficit or surplus

    The nominal deficit can be expressed as;

    nominal deficit/surplus=Revenue - (Interest on debt+Government expenditures)

    where;

    Government expenditures=$145 billion

    interest on debt=21.6 billion

    revenues=$160 billion

    replacing;

    nominal deficit/surplus=160 - (145+21.6) = 160-166.6=-$6.6 billion

    The nominal deficit=$6.6 billion

    c). Determine the real deficit or surplus

    The real deficit/surplus can be expressed as;

    real deficit = (inflation*total nominal debt) - nominal deficit

    where;

    nominal deficit=$6.6 billion

    inflation=3%=3/100=0.03

    total nominal debt=$360 billion

    replacing;

    real deficit/surplus = (0.03*360) - 6.6=10.8-6.6=$4.2 billion

    The government has a real budget surplus of $4.2 billion
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