Problem 3 The Ministry of Finance uses the standard Solow growth model to predict the long-run rate of GDP growth. The r

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Problem 3 The Ministry Of Finance Uses The Standard Solow Growth Model To Predict The Long Run Rate Of Gdp Growth The R 1 (45.15 KiB) Viewed 32 times

Problem 3 The Ministry of Finance uses the standard Solow growth model to predict the long-run rate of GDP growth. The rate of population growth equals 0.01; the rate of technological progress equals 0.04. The predicted rate of GDP growth helps to assess the stability of public debt-to-GDP ratio in (a) and (b) below. a) The real interest rate equals r=0.06. Tax revenues are equal to 40.5% of GDP (i.e. =0.405) and government expenditures on goods and services are equal to 40% of GDP (i.e. = 0.4); they are expected to remain at these levels. Show the dynamics of the debt-to-GDP ratio in a graph. Is the debt explosive or it will stop growing? b) Now assume that interest rate, GDP growth rate, and government spending are as in (a). The government changes the tax revenues in order to stabilize the debt-to-GDP ratio at 120% of GDP. Calculate the new value of tax revenues in percent of GDP.