When deficits are run continuously with a constant nominal interest rate,nominal interest payments on the total nominal debt will become smaller relative to future deficits,ceteris paribus.

Question

Quizplus · Accepted Answer

When deficits are run continuously with a constant nominal interest rate, the total nominal debt increases due to the accumulation of deficits. As the debt grows, the nominal interest payments on this increasing debt also grow, assuming the interest rate remains constant. Therefore, nominal interest payments become larger relative to future deficits, not smaller, because the interest payments are calculated on an increasingly larger debt.

When Deficits Are Run Continuously with a Constant Nominal Interest