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Assume you need to write a very short report on the future behavior of public debt and primary balance in Spain. Suppose the government has
Assume you need to write a very short report on the future behavior of public debt and primary balance in Spain. Suppose the government has a high level of public debt equal to 100% of GDP and assume that nominal GDP was increasing at 3% per year with steady inflation at 2%. Moreover, you know that there are prospects that the economy will go into recession next year with 0% inflation. First, explain the possible scenarios for public debt and real interest rates if the government is trying to maintain a balanced primary deficit. In this report, you must also explain the possible scenarios for public debt, real interest rates, and primary deficit when the primary deficit is unbalanced. Use the theories you learned in class and refer to the course material to explain your answer. (max 15 lines)
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