Question

4. Suppose a country’s debt rises by 10% and its GDP rises by 12%.
a. What happens to the debt-GDP ratio? b. Does the relative level of the initial values affect your answer?

Answer 1

a. The debt-GDP ratio will change by 1.1/1.12 = 0.982, so it will decrease by 1.8%.

b. The relative level of the initial values doesn't affect the final answer.