Consider an economy characterized by the following facts:

i. The official budget deficit is 4% of GDP. ii. The debt-to-GDP ratio is 100%. iii. The nominal interest rate is 10%. iv. The inflation rate is 7%.

(a) What is the primary deficit/surplus ratio to GDP?(2 marks) (b) What is the inflation-adjusted deficit/surplus ratio to GDP?(2 marks) (c) Suppose that output growth rate is constant at 2%. Will the debt-to-GDP ratio go up or down over time?(3 marks) (d) Suppose instead that the economy has a balanced budget and has decided to reduce taxes in period 1 resulting in a deficit of $1million and wants to repay its debt in full after 2 periods. How much primary surplus might the government have in period 2? (3 marks)