1. How does the evolution of the debt-to-GDP ratio 2 depend on g (the growth rate) and i (the interest rate)? Explain how inflation could help to reduce the debt-to-GDP ratio . BL
1. How does the evolution of the debt-to-GDP ratio 2 depend on g (the growth rate) and i (the interest rate)? Explain how inflation could help to reduce the debt-to-GDP ratio . BL
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:1. How does the evolution of the debt-to-GDP ratio i depend on g (the
growth rate) and i (the interest rate)? Explain how inflation could help
to reduce the debt-to-GDP ratio .
Bt
2. Consider the steady-state debt-to-GDP ratio
(G-T)
В
bss
Y
g – i
(a) Derive this relationship mathematically. What does this relation-
ship describe?
(b) Assume an economy with a government that targets a long-run debt-
to-GDP ratio of 75%. If the economy is growing at 3.0% per year,
and the government pays an interest rate of 1.5% per year on its debt,
how high a primary deficit can the government run (as a percent of
GDP) without increasing its debt-to-GDP ratio?
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