Question

I need step by step solution to the following this question asap .I have limited time so please do it quickly with detailed explanation

thanks in advance/Ha

1. “Once a country has a big enough debt/GDP ratio, it is stuck in a trap, because austerity depresses growth.” Do you agree?

Answer 1

A high debt-to-GDP ratio isn't necessarily bad, as long as the country's economy is growing, since it's a way to use leverage to enhance long-term growth.

For instance, consider the fact that Japan's 2011 debt-to-GDP ratio is over 200%, but its economy received very little analyst attention, while Greece's is only 160% and many rating agencies were predicting its collapse.

A higher debt-to-GDP ratio is acceptable when the buyers of the debt are either domestic investors (citizens) or repeat buyers that have a reason for buying. For instance, Japan's buyers are domestic and the U.S.'s buyer (China) purchases debt to keep a favorable trade balance with its largest consumer.

A higher debt-to-GDP ratio is acceptable when an economy is rapidly growing because its future earnings will be able to pay off the debt more quickly. For instance, a country projected to grow 5% next year will automatically see the ratio decline, whereas a country projected to contract will see it grow.