Assume a country's nominal GDP is $600 billion, government expenditures less debt service are $145 billion, and revenue is $160 billion. The nominal debt is $360 billion. Inflation is 3 percent and interest rates are 6 percent.

a. Calculate debt service payments. b. Calculate the nominal deficit or surplus. Add a negative sign before the value to indicate a deficit. c. Calculate the real deficit or surplus, placing a negative sign in front of the value if it is a deficit.

a). Debt service payments=$21.6 billion

b). The nominal deficit=$6.6 billion

c). The government has a real budget surplus of $4.2 billion

Explanation:

a). Determine the debt service payments

The debt service payments can be expressed as;

Debt service payments=Nominal debt*interest rate

where;

nominal debt=$360 billion

interest rate=6%=6/100=0.06

replacing;

Debt service payments=360*0.06=$21.6 billion

Debt service payments=$21.6 billion

b). Determine the nominal deficit or surplus

The nominal deficit can be expressed as;

nominal deficit/surplus=Revenue - (Interest on debt+Government expenditures)

where;

Government expenditures=$145 billion

interest on debt=21.6 billion

revenues=$160 billion

replacing;

nominal deficit/surplus=160 - (145+21.6) = 160-166.6=-$6.6 billion

The nominal deficit=$6.6 billion

c). Determine the real deficit or surplus

The real deficit/surplus can be expressed as;

real deficit = (inflation*total nominal debt) - nominal deficit

where;

nominal deficit=$6.6 billion

inflation=3%=3/100=0.03

total nominal debt=$360 billion

replacing;

real deficit/surplus = (0.03*360) - 6.6=10.8-6.6=$4.2 billion

The government has a real budget surplus of $4.2 billion