Question: (b) Suppose that we look at debt burden effect only and evaluate this effect relative to GDP. Den…

02 May Question: (b) Suppose that we look at debt burden effect only and evaluate this effect relative to GDP. Den…

Posted at 07:23h in 2Past Paper by Exams

(b) Suppose that we look at debt burden effect only and evaluate this effect relative to GDP. Denote by De1 the last year nominal debt, by Pe-the last period price level and by Ye1-the last period real output. Denote by the growth rate of output between t and t-1, by-the growth rate of price level (the rate of inflation) between t and t-1 and by hom the nominal interest rate. Assume that the change in debt comes only from the interest paid and write down an expression for the current (period t) nominal debt expressed relative to current (period t) nominal GDP. Then express the current period values by the last period ones adjusted for the growth rates and use linear (Taylor) approximation to derive the expression stated on p.400.

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