Suppose that a country has no public debt in year 1 but experiences a budget def

Question

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 2, a budget deficit of $30 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5.

a. What is the absolute size of its public debt in year 5?

Instructions: Enter your answer as a whole number. Do not include a plus or minus sign.

Public Debt = $ _________________billion.

b. If its real GDP in year 5 is $104 billion, what is this country’s public debt as a percentage of real GDP in year 5?

Instructions: Round your answer to 2 decimal places.

Public Debt =_______________ percent.

Explanation / Answer

(a) Calculate the absolute size of public debt in year 5 -

Absolute size of public debt = Budget deficit in year 2 + Budget deficit in year 3 - Budget surplus in year 4 + Budget deficit in year 5

Absolute size of public debt = $40 billion + $30 billion - $10 billion + $2 billion = $62 billion

The absolute size of public debt is $62 billion.

(b) Public debt = $62 billion

Real GDP = $104 billion

Calculate public debt as a percentage of real GDP in year 5 -

Public debt as a percentage of real GDP = (Public debt/Real GDP) * 100 = ($62 billion/$104 billion) * 100 = 59.61%

The public debt as a percentage of real GDP in year 5 is 59.61%.

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