Which of the following will cause a decrease in the debt- to- GDP ratio?
A) An increase in the real interest rate.
B) An increase in the ratio of the primary deficit to GDP.
C) An increase in investment.
D) An increase in consumption.
E) An increase in the growth rate of output.

Question

Quizplus · Accepted Answer

An increase in the growth rate of output would cause the GDP to increase faster than the debt, leading to a decrease in the debt-to-GDP ratio. A higher real interest rate (A) would increase the cost of servicing the debt, thereby increasing the debt-to-GDP ratio. An increase in the ratio of the primary deficit to GDP (B) would increase the amount of borrowing needed to finance government spending, leading to a higher debt-to-GDP ratio. An increase in investment (C) or consumption (D) would increase GDP, but may not necessarily lead to a decrease in the debt-to-GDP ratio if the increase in GDP is not enough to offset the increase in debt.

Which of the Following Will Cause a Decrease in the Debt-