Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 2%
- growth rate of real GDP = 3%
- current debt- to- GDP ratio = 50%
- primary budget deficit = 0
Over this one- year period the debt- to- GDP ratio will have

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio can be calculated as follows:

Debt-to-GDP ratio at the beginning of the year = 50%
Real GDP growth rate = 3%
Real interest rate on government bonds = 2%
Primary budget deficit = 0

Using the debt dynamics equation:

Change in Debt-to-GDP ratio = (Real Interest Rate - Real GDP Growth Rate) x Debt-to-GDP ratio + Primary Budget Deficit

= (2% - 3%) x 50% + 0
= -0.5%

Therefore, the debt-to-GDP ratio will have fallen by 0.5 percentage points.

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