What must be the size of the primary surplus

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Suppose GDP is $1,000 billion, the national debt last year was $500 billion, the interest rate paid on government debt is 7%, and GDP is growing by 5% per year.

a. If the goal of the government is to hold the debt-GDP ratio constant, what must be the size of the primary surplus and the size of total budget surplus? Explain your answer.

b. Suppose the interest rate paid on government debt were to decrease to 5% and the growth rate of GDP were to increase to 7% while GDP remained at $1,000 billion and the national debt last year remained at $500 billion, what must be the size of the primary surplus and the size of the total budget surplus? Explain your answers.

Reference no: EM132405837

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