Suppose that the real rate of interest is 3 percent and the growth rate of real GDP is 1 percent. If the government has a positive stock of outstanding debt and its goal is to hold the debt- to- GDP ratio constant at its current level, then it

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A primary budget surplus means that the government collects more in revenue than it spends on all programs except for debt interest payments. By running a primary budget surplus, the government can use the excess revenue to pay down outstanding debt, which will help keep the debt-to-GDP ratio constant. Since the real interest rate is 3 percent and the growth rate of real GDP is 1 percent, the government needs to run a primary budget surplus of at least 2 percent of GDP to keep the debt-to-GDP ratio constant.

Suppose That the Real Rate of Interest Is 3 Percent