Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is less than the growth rate of real GDP, then

Question

Quizplus · Accepted Answer

If the government has a primary budget surplus, it means that it is generating enough revenue to cover its expenditures other than interest payments on its outstanding debt. Therefore, the government can use the surplus to pay down its outstanding debt, reducing the debt-to-GDP ratio. If the real interest rate on government bonds is less than the growth rate of real GDP, it means that the economy is growing faster than the interest payments on the debt, making it easier for the government to pay down the debt. This combination of a budget surplus and a favorable interest rate environment would lead to a decrease in the debt-to-GDP ratio.

Consider a Government with an Outstanding Stock of Public Debt