Suppose that the real rate of interest is 3% and the growth rate of real GDP is 1%.If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant at its current level,then it

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If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant, it means that the government needs to avoid increasing the debt over time relative to the size of the economy. To do this, the government needs to ensure that the present value of its primary surpluses (i.e. the government’s revenues minus non-interest expenses) is at least equal to the present value of its interest payments on the debt.

In this case, if the real interest rate is 3% and the growth rate of real GDP is 1%, the nominal GDP growth rate would be 4%. Therefore, if the government wants to keep the debt-to-GDP ratio constant, it needs to ensure that its primary budget surplus is at least 4% of GDP (which equals the nominal interest rate on the debt of 3% plus the growth rate of nominal GDP of 4% multiplied by the debt-to-GDP ratio). In other words, the government needs to run a primary budget surplus of at least 1% of GDP (4% - 3%).

Suppose That the Real Rate of Interest Is 3% and the Growth