Suppose that the debt to GDP ratio ina hypothetical country reaches 200%. For ma

Question

Suppose that the debt to GDP ratio ina hypothetical country reaches 200%. For many years, investors hadbeen willing to lend to the government at very low interest rates.But now, investors become worried that the government might defaulton its debt -- that is, might refuse to pay the investors back. Asa result, the investors are now willing to lend to the governmentonly if they receive a high interest rate of 20%. (Several yearsbefore Argentina defaulted on its debt, investors demanded interestrates on its debt of more than 20% per year, so 20% is not anunrealistic number.)

Suppose that debt is equal to 180 trillion ducats and GDP is equalto 90 trillion ducats. If interest payments are equal to theinterest accrued in a given year, how much would the government'sinterest payments on its debt be as a percentage of GDP? A.   4% B.   20% C.   12% D.   2% E.   40% Suppose that the debt to GDP ratio ina hypothetical country reaches 200%. For many years, investors hadbeen willing to lend to the government at very low interest rates.But now, investors become worried that the government might defaulton its debt -- that is, might refuse to pay the investors back. Asa result, the investors are now willing to lend to the governmentonly if they receive a high interest rate of 20%. (Several yearsbefore Argentina defaulted on its debt, investors demanded interestrates on its debt of more than 20% per year, so 20% is not anunrealistic number.) Suppose that debt is equal to 180 trillion ducats and GDP is equalto 90 trillion ducats. If interest payments are equal to theinterest accrued in a given year, how much would the government'sinterest payments on its debt be as a percentage of GDP? A. 4% B. 20% C. 12% D. 2% E. 40%

Explanation / Answer

It would be 40%

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