In 2010, a country had a nominal GDP of $15 trillion, a net public debt of $9 trillion, and a nominal interest rate of 5 percent. The country’s nominal GDP is growing at 5 percent annual rate.
(a) What is the value of the net public debt/GDP ratio in 2010?
(b) What is the amount of interest paid on the net public debt in 2010? What was the interest payment as a percentage of nominal GDP in 2010?
(c) If the government issues new net debt in 2011 to cover the amount of interest paid on its net debt in 2010, what is the new level of net public debt in 2011? How much interest has to be paid in 2011 on the net public debt, assuming the nominal interest rate is still 5 percent?
(d) What is the level of nominal GDP in 2011? Compare the percentage of nominal GDP going for interest payments in 2011 to that of 2010. Compare the ratios of net public debt for the two years. Is the ratio of net public debt to nominal GDP equal in the two years? If so, why? If not, why not?
(e) Assume the nominal interest rate for the two years was actually 6 percent instead of 5 percent. How does this change affect your answers to parts b–d?
(f) Assume the nominal interest rate for the two years was actually 4 percent instead of 5 percent. How does this change affect your answers to parts b–d?