Question

The following table describes budgets of central and local governments in a given year:

Central gov't purchases of goods	$950
Central gov't transfer payments	$220
Central gov't net interest payments	$60
Central gov't tax receipts	$1150
Local gov't purchases of goods	$300
Local gov't transfer payments	$110
Local gov't net interest payments	$40
Local gov't tax receipts	$200
Total central gov't debt	$6000
Total local gov't debt	$4000
Central gov't debt held by local gov'ts	$0
Local gov't debt held by central gov't	$0

The interest rate that both the central and the local governments pay on their debt is 1%. The total central government budget deficit is 2% of GDP. What is the debt-to-GDP ratio?

		100%
		68%
		60%
		150%
		125%
		48%

Answer 1

For balanced budget => Injections should be equal to Leakages, in the economy.

Budget deficit = Injections [ government expenditure + investments + exports ] - Leakages [ saving + taxes + impots ]

Leakages = Central gov't tax receipts + Local gov't tax receipts

= 1150 + 200

= 1350

Injections =

Central gov't purchases of goods	$950
Central gov't transfer payments	$220
Central gov't net interest payments	$60
Local gov't purchases of goods	$300
Local gov't transfer payments	$110
Local gov't net interest payments	$40

Total = 1680

Budget deficit = 1680 - 1350

= 330

The total central government budget deficit is 2% of GDP.

2% of GDP = 330

1% of GDP = 330/2 = 165

100% of GDP = 16500

Total debt =

Total central gov't debt	$6000
Total local gov't debt	$4000

Total = 10000

debt-to-GDP ratio = Total debt / GDP

= 10000 / 16500

= 0.6060 = 60% approx

Option C) is correct debt-to-GDP ratio is 60%.