The DEBTLAND's debt-GDP ratio in 2004 was 0.7, but it went down by 20 percent in 2005. If the interest rate paid on debt is 4 percent and the economy grow by 4 percent in 2005, the DEBTLAND's primary deficit to GDP ratio must

Question

Quizplus · Accepted Answer

The primary deficit to GDP ratio is calculated as the difference between government expenditure and revenue, excluding interest payments on debt, divided by GDP. As the debt-GDP ratio decreased by 20 percent, the interest payments on debt would also decrease, leading to a reduction in the primary deficit to GDP ratio. Since the economy grew by 4 percent, the revenue side of the equation would increase, further decreasing the primary deficit to GDP ratio. Therefore, the correct answer is B: the primary deficit to GDP ratio must have decreased by 20 percent.

The DEBTLAND's Debt-GDP Ratio in 2004 Was 0