3.2 [related to the Economics in Practice on p. 530] Excessive and cumulative public deficits might lead to an increase in the debt-to-GDP ratio, often used to measure the “weight”

of public debt on the economy. The average debt-to-GDP ratio for OECD countries was, in 2014, 94 percent. Apart from the argument, put forward by some economists (see problem 1.4 above), that excessive public debt levels are detrimental to economic growth, many governments have an interest in reducing government debt – starting from the fact that governments pay interest on their debt, and that interest payments are often an important item in government budgets. Assume that country A has a GDP of $500 billion, a total government debt of $450 billion, a marginal propensity to save of 0.2, and that for this year government expenditure equals $200 while tax receipts amount to $180.

The government has just announced spending cuts of $20 billion next year with no change in taxation. Would that suffice to reach the government’s twin objectives – a balanced budget and a debt-to-GDP ratio below the OECD average? Why?