ECO - If the fiscal deficit is 7% of GDP, and the public, both domestic and foreign
1. a) A. If the fiscal deficit is 7% of GDP, and the public, both domestic and foreign, buy new Treasury bonds equal to 5% of GDP, what is the percentage of new Treasury bonds that are sold to the Federal Reserve Bank (our Central Bank)?
b) If Treasury debt owed to the public is 73% of GDP, what will be the new ratio of debt to GDP following the financing of the deficit by bond sales by the Treasury? (Hint: note that the sale of US Treasury bonds to the Federal Reserve Bank are not “held by the public.”)
c) Discuss the following statement, indicating whether you agree or disagree and argue your case.
“If debt grows forever faster than income, there will be a debt default.”
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