Suppose GDI' is $1000 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 the size of the primary surplus be? What is the size of the total budget surplus in this case?
b. If the interest rate paid on government debt were 5% and the growth rate of GDP were 7%, what would the primary surplus need to be to maintain a constant debt-GDP ratio? What is the size of the total budget surplus in this case?