What are strengthen or weaken the argument that monetary

Reference no: EM1347720

Suppose that nominal GDP equals $14,000 billion, the current budget deficit is $112 billion, and the government's debt-GDP ratio is 20 percent.

a. Given that the government wishes to maintain the debt-GDP ratio at 20 percent, explain whether the government needs to decrease its budget deficit, maintain the current budget deficit, or can increase its budget deficit if over the next year, nominal GDP grow by: (i) 2 percent; (ii) 4 percent; and (iii) 6 percent.

b. Assume that the only differences between the three nominal GDP growth rates given in part a are the growth rates of real GDP. Given your answer to part a, do the fiscal policies imposed by the desire to maintain a constant debt=GDP ratio seem appropriate from the standpoint of stabilization policy?

c. Do your answers to part b strengthen or weaken the argument that monetary policy should be the primary tool for smoothing the business cycle?

Reference no: EM1347720

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