Suppose the real interest rate on government bonds is 5 percent while the growth rate of real GDP is 4 percent, and that the government's current debt- to- GDP ratio is 30 percent. If the government has a primary budget balance of zero in the current year, the debt- to- GDP ratio will

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The correct answer is B. The debt-to-GDP ratio will rise by 0.3 percentage points.The formula for the change in the debt-to-GDP ratio is:Δ(Debt/GDP) = (r - g) * (Debt/GDP) + (ΔDebt/GDP)where:r is the real interest rateg is the growth rate of real GDPDebt/GDP is the current debt-to-GDP ratioΔDebt/GDP is the change in the debt-to-GDP ratioIn this case, r = 5%, g = 4%, and Debt/GDP = 30%. The government has a primary budget balance of zero, so ΔDebt/GDP = 0.Plugging these values into the formula, we get:Δ(Debt/GDP) = (0.05 - 0.04) * 0.30 + 0 = 0.003Therefore, the debt-to-GDP ratio will rise by 0.3 percentage points.

Suppose the Real Interest Rate on Government Bonds Is 5