Suppose an economy has a GDP of $40 billion and a national debt of $20 billion, and the average interest rate on this debt is currently 3%. Calculate the annual interest payments on the debt. What percentage of this economy’s GDP is spent on interest payments on its debt? Suppose that next year, one of two events occurs: (1) GDP and interest rates stay the same, but the economy adds $4 billion to its national debt, or (2) GDP and the national debt stay the same, but the average interest rate on the debt increases to 4%. Which of the two events will result in a larger portion of the economy’s GDP going toward interest payments on the national debt?

The national debt is the total amount of outstanding borrowing by the government accumulated over…

Answered: Suppose an economy has a GDP of $40…

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter17: Federal Deficits, Surpluses, And The National Debt

Section: Chapter Questions

Problem 7SQP

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Suppose an economy has a GDP of $40 billion and a national debt of $20 billion, and the average interest rate on this debt is currently 3%.

Calculate the annual interest payments on the debt.

What percentage of this economy’s GDP is spent on interest payments on its debt?

Suppose that next year, one of two events occurs: (1) GDP and interest rates stay the same, but the economy adds $4 billion to its national debt, or (2) GDP and the national debt stay the same, but the average interest rate on the debt increases to 4%. Which of the two events will result in a larger portion of the economy’s GDP going toward interest payments on the national debt?

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