Markets: A Rigorous Course

M11 · Problem 14 ★★ Check

Debt dynamics

A government has debt of 82% of GDP, pays an effective nominal rate of 7.3% and has nominal GDP growth of 10% (hypothetical). (a) With a primary deficit of 2% of GDP, compute next year's debt ratio. (b) Find the primary balance that stabilises the ratio. (c) Repeat (a) and (b) with i=8.5%i=8.5\% and gn=8%g_n=8\%, a stylised "hiking into a slowdown". (d) Relate your answer to Dalio's long-term debt cycle.

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