Suppose that the real rate of interest on government bonds is 4 percent and the growth rate of real GDP is 2 percent. If the government has a positive stock of outstanding debt and its policy objective is to hold the debt- to- GDP ratio constant at its current level, it must

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In order to hold the debt-to-GDP ratio constant, the government must ensure that its debt grows no faster than real GDP. This can be achieved by running a primary budget surplus, which means that government revenue exceeds non-interest spending, thus reducing the overall deficit and preventing the stock of outstanding debt from growing faster than real GDP. Running a cyclically balanced budget, eliminating the overall deficit, or running an annually balanced budget may not necessarily achieve this goal, whereas running a primary budget deficit would actually increase the stock of debt and worsen the debt-to-GDP ratio over time.

Suppose That the Real Rate of Interest on Government Bonds