- 5 Answer All Parts A C Of This Question A 10 Marks Using A Diagram To Illustrate Your Answer Explain Why The D 1 (24.13 KiB) Viewed 15 times
- 5 Answer All Parts A C Of This Question A 10 Marks Using A Diagram To Illustrate Your Answer Explain Why The D 2 (24.13 KiB) Viewed 15 times
ratio in an economy may explode over time when the real interest rate is higher than
the growth rate of real GDP. Explain what a government can do in such a case to
keep under control the debt to GDP ratio.
(b) Outline the main differences between the traditional and the Ricardian
Equivalence view of government deficits. What are the main assumptions behind the
Ricardian Equivalence view?
(c) Explain why the assumptions behind Ricardian Equivalence may not hold
in reality.
5. Answer all parts (a)-(c) of this question. (a) [10 marks] Using a diagram to illustrate your answer explain why the debt to GDP ratio in an economy may explode over time when the real interest rate is higher than the growth rate of real GDP. Explain what a government can do in such a case to keep under control the debt to GDP ratio. (b) [9 marks] Outline the main differences between the traditional and the Ricardian Equivalence view of government deficits. What are the main assumptions behind the Ricardian Equivalence view? (c) [6 marks] Explain why the assumptions behind Ricardian Equivalence may not hold in reality.