Assume a country’s nominal GDP is $500 billion, government expenditures less deb

Question

Assume a country’s nominal GDP is $500 billion, government expenditures less debt service are $180 billion, and revenue is $190 billion. The nominal debt is $280 billion. Inflation is 2 percent and interest rates are 4 percent.
   
a. Calculate debt service payments.
  
    Instructions: Round your answer to 1 decimal place. Leave no cell blank. You must enter "0" for the answer to grade correctly.

    $ billion.

b. Calculate the nominal deficit or surplus. Add a negative sign before the value to indicate a deficit.
   
    Instructions: Round your answer to 1 decimal place. Leave no cell blank. You must enter "0" for the answer to grade correctly.
  
    $ billion.

c. Calculate the real deficit or surplus, placing a negative sign in front of the value if it is a deficit.
  
    Instructions: Round your answer to 1 decimal place. Leave no cell blank. You must enter "0" for the answer to grade correctly.

    $ billion (Click to select)real surplusreal deficit.

Explanation / Answer

(a) Debt service payment = Nominal debt x Interest rate = $280 billion x 4% = $11.2 billion

(b) Budget balance ($ billion) = Revenue - (Government expenditure + Debt service)

= 190 - (180 + 11.2) = 190 - 191.2 = - 1.2

So, nominal deficit = - $1.2 billion

(c) Real deficit = Nominal deficit / (1 + Inflation rate) = - $1.2 billion / 1.02 = - $1.2 billion

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