Please include steps and explanations, thank youAssume that the public debt in an economy is equal to 100% of GDP. Government spending
(without interest payments) are equal to 40% of GDP and net tax revenues are equal to 41% of
GDP.
A) Assume that in time t, the real interest rate on public debt is 3% and the GDP growth
rate is 1%. Calculate public debt to GDP in time t+1.
B) Assume now, that due to a negative demand shock, the rate of growth of GDP in time t
is 0%. Calculate the public debt to GDP in time t+1.
C) Assume that the government is forced to stabilise public debt to GDP and increasing
taxation is impossible. By how much does the government need to change spending (in
% of GDP), in order to stabilise public debt in scenario b)? Assume ceteris paribus
D) Relying on DAD/DAS model, show the consequences of fiscal policy described in c).
Assume that the fiscal shock lasts for 3 periods. What will happen with GDP growth
rate? How will GDP dynamics influence the likelihood of debt stabilization?nk youPlease include steps and explanations, thank you
Assume that the public debt in an economy is equal to 100% of GDP. Government spending (without interest payments) are equal to 40% of GDP and net tax revenues are equal to 41% of GDP. A Assume that in time t,the real interest rate on public debt is 3% and the GDP growth rate is 1%.Calculate public debt to GDP in time t+1. B) Assume now, that due to a negative demand shock, the rate of growth of GDP in time t is 0%.Calculate the public debt to GDP in time t+1 C) Assume that the government is forced to stabilise public debt to GDP and increasing taxation is impossible. By how much does the government need to change spending (in % ofGDP),in order to stabilise public debt in scenario b)? Assume ceteris paribus D Relying on DAD/DAS model, show the consequences of fiscal policy described in c Assume that the fiscal shock lasts for 3 periods. What will happen with GDP growth rate? How will GDP dynamics influence the likelihood of debt stabilization?