a. Use the fact that the nominal deficit equals the nominal primary deficit plus nominal interest payments on government debt to rewrite Equation (15.4) showing the change in the debt-GDP ratio as a function of the ratio of the primary deficit to GDP, the ratio of debt to GDP, and the difference between the growth rate of nominal GDP and the nominal interest rate.

b. Show that, if the primary deficit is zero, the change in the debt-GDP ratio equals the product of (1) the debt-GDP ratio and (2) the excess of the real interest rate over the growth rate of real GDP.

Eq (15.4)

Transcribed Image Text:

change in debt-GDP ratio = deficit nominal GDP total debt nominal GDP growth rate of nominal GDP