Equilibrium debt-income ratio

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Reference no: EM13948414

A country has no in ation, is growing at 2.5% and has a nominal interest of 4%. It is presently running a budget de cit as a proportion of GDP of 6%.

(i) What is the expression for b(t) in terms of b(t -1)?

(ii) What is the equilibrium debt/income ratio? Is this country a creditor or debtor in equilibrium?

(iii) If the initial debt/income ratio is 30%, will this rise or fall over time?

(iv) Draw b against b and the phase line for this model.

Reference no: EM13948414

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