b. Now suppose that the gross national debt initially is equal to $2.5 trillion

Question

b. Now suppose that the gross national debt initially is equal to $2.5 trillion and the federal government then runs a deficit of $100 billion:
i. What is the new level of gross national debt?
ii. If 100 percent of this deficit is financed by the sale of securities to the public, what happens to the level of debt held by the public? What happens to the level of gross debt?
iii. If GDP increases by 6 percent in the same year as the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?

Explanation / Answer

b. i. The new debt is $2.6 trillion.
ii. Both gross debt and debt held by the public rise by $100 billion.
iii. Both gross debt and debt held by the public rise by 4 percent, thereby falling as a percent of GDP.

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