Consider an economy characterized by the following facts:

i. The official budget deficit is \(4 \%\) of GDP.

ii. The debt-to-GDP ratio is \(100 \%\).

iii. The nominal interest rate is \(10 \%\).

iv. The inflation rate is \(7 \%\).

a. What is the primary deficit/surplus ratio to GDP?

b. What is the inflation-adjusted deficit/surplus ratio to GDP? There is a "rule-of-thumb" in the chapter to understand how the actual deficit changes when output falls below its natural level.

c. Suppose that output is \(2 \%\) below its natural level. What is the cyclically adjusted, inflation-adjusted deficit/surplus ratio to GDP?

d. Suppose instead that output begins at its natural level and that output growth remains constant at the normal rate of \(2 \%\). How will the debt-to-GDP ratio change over time?