Suppose, for a hypothetical country in 1994, the debt to GDP ratio was 120 percent and the deficit to GDP ratio was 10 percent. If it were not for interest payments on the debt, this country would have a balanced budget.

(A) What was the average rate of interest this country paid on its debt?

(B) In 1994, Italy was reported to have the same debt and deficit ratios as this hypothetical country. The only difference was that Italy would have had a budget surplus if not for the interest payments on the debt. Was the average rate of interest that Italy paid more or less than the rate of interest calculated in part (A) above?

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ANSWER A The average rate of interest this country paid on i... View the full answer