Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 03 Feb 2018 My Price 7.00

stability of fiscal policy

The stability of fiscal policy. (Blinder and Solow, 1973.) By definition, the budget deficit equals the rate of change of the amount of debt outstanding: δ(t) ≡ D˙ (t). Define d(t) to be the ratio of debt to output: d(t) = D(t)/Y(t). Assume that Y(t) grows at a constant rate g > 0.

a) Suppose that the deficit-to-output ratio is constant: δ(t)/Y(t) = a, where a > 0.

(i) Find an expression for ˙d(t) in terms of a, g, and d(t)

(ii) Sketch ˙d(t) as a function of d(t). Is this system stable?

(b) Suppose that the ratio of the primary deficit to output is constant and equal to a > 0. Thus the total deficit at t, δ(t), is given by δ(t) = aY(t) + r (t)D(t), where r (t) is the interest rate at t. Assume that r is an increasing function of the debt-to-output ratio:  

(i) Find an expression for ˙d(t) in terms of a, g, and d(t).

(ii) Sketch ˙d(t) as a function of d(t). In the case where a is sufficiently small that ˙d is negative for some values of d, what are the stability properties of the system? What about the case where a is sufficiently large that ˙d is positive for all values of d?

Answers

Maurice Tutor
(5)
Status NEW Posted 03 Feb 2018 08:02 PM My Price 7.00

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