Consider changes in the government's debt-to-GDP ratio.Suppose that over a one year period the government has a primary budget surplus,and the real interest rate on government bonds is higher than the growth rate of real GDP.What is the effect on the debt-to-GDP ratio?

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio's movement depends on the relative sizes of the primary budget surplus and the difference between the real interest rate and the growth rate of real GDP. If the surplus is large enough to offset the cost of higher interest rates compared to GDP growth, the ratio could fall, remain stable, or rise, hence the outcome is uncertain without knowing the specific magnitudes.

Consider Changes in the Government's Debt-To-GDP Ratio