Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3%
- growth rate of real GDP = 1%
- current debt- to- GDP ratio = 40%
- primary budget deficit as a percentage of GDP = 2%
Over this one- year period the debt- to- GDP ratio will have risen by

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio at the beginning of the year is 40%. The primary budget deficit as a percentage of GDP is 2%, which means the government is spending 2% more than what it generates in revenue. This will add to the debt. However, the real interest rate on government bonds is 3%, which means the debt will increase at a slower rate. 
To calculate the increase in debt-to-GDP ratio, we can use the following formula: 
ΔDebt-to-GDP = Deficit-to-GDP + (Deficit-to-GDP x (Real Interest Rate - Growth Rate))
Substituting the values, we get: 
ΔDebt-to-GDP = 2% + (2% x (3% - 1%))
ΔDebt-to-GDP = 2% + (2% x 2%)
ΔDebt-to-GDP = 2% + 0.04%
ΔDebt-to-GDP = 2.04%
Therefore, the debt-to-GDP ratio will rise by 2.04% or 2.8 percentage points (since the starting ratio is 40%). The correct answer is E.

Consider the Following Data About Government Debt and Deficit in a Given