Question

1. Suppose an economy has a debt to GDP ratio of 110%, a real growth rate of 2.5% and interest rates of 1%. Assuming their deficit is zero, should they be concerned with debt stability? What affect would fiscal consolidation have on growth rates?

Answer 1

Since the real growth rate is fairly low comparing worlds average GDP groeth rate at 3% and the interest rate regime too is quantitatively low at 1% which implies heavy liquidity and thus higher government borrowing. This all will create negative repurcussions like piling debt and higher economic growth and expansionary economy which ultimately will also cause hyperinflation and hence debt stability is highly concerned topics.

If government looks for fiscal consolidation where deficits are aimed to be zeroed down the growth ultimately stops as contractionary fiscal policy is applied.