Question

At the end of 2018, the federal government debt of the U.S. stood at 104% of GDP. Imagine that, unlike in previous years, from 2019 on the federal government runs a balanced primary budget, i.e. total primary federal government expenses are equal to total federal government revenues. Also suppose that in all years starting from 2019, the nominal GDP will grow at 3% and the interest rate at which the U.S. government can borrow will be 2%. What will be the U.S. federal debt as a fraction of GDP in year 2050

Answer 1

Answer:

The U.S. federal debt as a fraction of GDP in year 2050 will be 77%

Explanation:

According to the given data we have the following:

Debt in the end of 2018 = 104% of GDP

Nominal GDP growth = 3%

Interest on debt = 2%

In order to calculate What will be the U.S. federal debt as a fraction of GDP in year 2050 first we have to calculate the debt in 2050 using the following formula:

Debt in 2050 = Current Debt*(1+r%)n

Debt in 2050 = 104*1.0232 = 196

Next, we would have to calculate the GDP in 2050 using the following formula:

GDP in 2050 = Current GDP*(1+r%)n

GDP in 2050 = 100*1.0332 = 257.5

Therefore, Debt as percentage of GDP in 2050 = 196/ 257 = 77%