Which of the following will cause an increase in the debt-to-GDP ratio?
A)a reduction in the real interest rate
B)a reduction in the ratio of the primary deficit to GDP
C)a reduction in the growth rate of output
D)all of the above

Question

Quizplus · Accepted Answer

A reduction in the real interest rate (A) would decrease the amount of interest expenses paid on the debt, which would reduce the debt-to-GDP ratio. A reduction in the ratio of the primary deficit to GDP (B) would mean that the government is borrowing less to fund its current spending, which would also decrease the debt-to-GDP ratio. However, a reduction in the growth rate of output (C) would decrease the denominator in the debt-to-GDP ratio (i.e., GDP), which would increase the debt-to-GDP ratio. Therefore, the correct answer is (C) only.

Which of the Following Will Cause an Increase in the Debt-To-GDP