Unlike households, governments are often able to sustain large debts. For example, in 2013, the US government’s total debt reached $17.3 trillion, approximately equal to 101.6% of
(a) Calculate the dollar cost of the annual interest on the government’s total debt assuming the interest rate and debt figures cited above.
(b) If the government operates on a balanced budget before interest payments are taken into account, at what rate must GDP grow in order for the debt-GDP ratio to remain unchanged.
(c) Calculate the total increase in national debt if the government incurs a deficit of $600B in 2014.
(d) At what rate would GDP have to grow in order for the debt-GDP ratio to remain unchanged when the deficit in 2014 is $600B?
(e) Why is the debt-GDP ratio the preferred measure of a country’s debt rather than the dollar value of the debt? Why is it important for a government to keep this number under control?
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