Question

The debt- to - GDP ratio will tend to decline over time when:

A) the initial level of debt increases

B) r<g

C) r>g

D) the primary deficit increases

Answer 1

The debt-to-GDP ratio is the ratio of comparing a country's public debt to its gross domestic product (GDP). The change in ratio depends upon 3 basic factors, i.e.,

• the interest rate, r,
• the growth rate of GDP, g and,
• the primary deficit

The lower the interest rate, the lesser resources the government must devote towards compensating it's creditors. Also, larger value of growth rate implies the rise of GDP

So, the correct option will be B), i.e. r<g, because interest rate is lower as compared to growth rate.