Economics Of Monetary Union

Question 1

Stabilising debts

Answer 1

If want to stabilise debt to GDP ratio (db /dt=0) at constant value if where m=dm/dt

When no money printing, dM/dt= (dm/dt)Y + m(dY/dt) = 0

Therefore (r-X)b=t-g

Question 2

Dynamics of debt accumulation

Answer 2

Interest rate on gov debt > growth rate of GDP –> debt to GDP ratio will increase without bonds

Debt accumulation can only be stopped if primary budget deficit (as % of gdp) turns into surplus
Or via seignorage
–> G-T+rB = dB/dT + dM/dT
Budget deficit can be financed by issuing debt (dB/dT) or by issuing high powered money (dM/dt)

Question 3

Logic of Maastricht criteria

Answer 3

Debt to GDP ratio should be 60%, deficit to GDP ratio 3%

(R-X)b=(t-g) tells us total gov deficit (including interest payments) –> d= g-t+rB when d=. 0.03 b=0.6 X=0.05 and d=xb

Question 4

If nominal interest rate > nominal growth rate of economy…

Answer 4

Either primary budget is sufficiently high surplus (t>g) or money creation = sufficiently high in order to stabilise debt to GDP ratio

Question 5

If country accumulated sizeable deficit in past…

Answer 5

It will now have to run large primary budget surpluses in order to pre to the debt to GDP ratio from increasing automatically
–> decreasing spending and or increasing taxes

Question 6

Debt to GDP ratio

Answer 6

G-T + rB = dB/dT + dM/dt

B= gov debt
M= high powered money 

–> g-t+rB = db/dt +bx+ dm/dt mx