assume b g and t are in real terms and in

Question

Assume B, G and T are in real terms (and in billions of dollars).

B_t-1 = 1000      G_t= 220           T_t= 200            i_t = .15    π_t = .10

a) Calculate the official measure of the deficit in year t.

b) Calculate the correct (i.e. inflation adjusted) measure of deficit in year t.

c) Calculate the primary deficit in year t.

d) Discuss what happens to the primary deficit in year t if the nominal interest rate in year t increases to 17%.

e) To what extent does the official measure of the deficit overstate the correct measure?

f) Given the above information, what will happen to the level of debt between years t-1 and t? Explain