NAA136: International Trade Theory - Economics Assignment Help

Assignment Task:

Task:

Introduction
In this assignment, you will analyze the development of the Government debt. Your group should be submitting a joint report. The title, term, group number and year of the assignment, as well as the group members’ names and social security numbers must be stated on the cover page. We take it for granted that everyone participates in the group work, but in addition to participation, you must state after each group member’s name the percentage that each participant was involved in solving the task. If you are four and everyone has participated equally, it will be 25% after each one. Submission is via Canvas. When answering the questions below, you can assume that interest rate it is constant, with the exception of question (f). You may benefit from looking at Chapter 17 of Mankiw, ‘Government Debt and Budget Deficits’.

TASK

(a) Primary Budget Balance
How big is the change in debt if the Government manages to keep the primary budget in balance year after year? What is the growth rate of the debt in this case? Use Equation

(1) to show and explain the result.
(b) Primary budget balance and the debt ratio

Use the expression for the debt’s growth rate, which you developed in the previous task, to simplify the expression for the change rate of the debt ratio in Equation (2). It can be said that the debt policy is sustainable if the debt ratio does not increase over time, i.e. if gd ≤ 0. What is required for this to be met? Explain!

(c) Total Budget Balance
What will be the change in the debt and the debt’s growth rate if the state keeps the total budget in balance every year? Use (1) to explain.

(d) Total Budget Balance and the Debt Ratio
Use the expression you just developed to simplify Equation (2). Is debt policy sustainable in this case? Explain!

(e) The one-percent target
Until fairly recently, there was a rule for the Government budget process in Sweden which said that there should be a total budget surplus corresponding to 1% of GDP.2 How does this rule change Equations (1) and (2)? Explain the consequences of this.

(f) Variable interest rate

Now assume that the interest rate varies with the Debt Ratio, so that

it = i0 + a × dt,

where i0 is a constant. This means that the interest rate rises when the country becomes more indebted, as the lenders then experience an increased risk that they will not get their money back.

Assume that the state keeps the primary budget in balance. What is the expression for the growth rate in D in this case? What will be the expression of the growth rate in the debt ratio? Interpret the latter equation. To facilitate this interpretation, it may help to note that the equation for gd has a positive and a negative term on the right. Try to illustrate the two terms in a figure with d on the horizontal axis. There is an intersection between the curves. Does d move towards or away from this point? Explain how the debt ratio develops, depending on where you start.

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