a) Public sector debt in a given country is equal to gross domestic product (GDP). The primary balance of public sector operations (T-G) is equal to -0.3% of GDP. Calculate the change in debt as a percentage of GDP if

i) Inflation () is zero, nominal interest rate (i) is 2% and economic growth (g) is 3%.

ii) Inflation () is zero, nominal interest rate (i) is 5% and economic growth (g) is 0% (no economic growth).

iii) Explain the difference between the results in i) and ii) in a few words.

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b) The economic outlook after the Covid epidemic has generally worsened in the West. Economic growth is slowing at the same time that real interest rates have risen. The massive accumulation of public debt during the epidemic has drawn attention to the need to stop that trend. This is a significant challenge even if revenues, expenditures and the primary balance of the public sector are reaching the same level as before the epidemic.

Describe the interaction between economic growth, real interest rate and primary balance on the development of debt and the effect of these changes on the sustainability of public finances following the epidemic in words and pictures. In this review, i.a. clarify which definition you use when discussing sustainable public finance.