A country has no in ation, is growing at 2.5% and has a nominal interest of 4%. It is presently running a budget de cit as a proportion of GDP of 6%.
(i) What is the expression for b(t) in terms of b(t -1)?
(ii) What is the equilibrium debt/income ratio? Is this country a creditor or debtor in equilibrium?
(iii) If the initial debt/income ratio is 30%, will this rise or fall over time?
(iv) Draw b against b and the phase line for this model.