FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust
A country has debt at 80% of GDP, an average interest rate of 5%, and nominal GDP growth of 3%. Ignoring the (1+g) denominator and approximating with d x (r - g), what primary surplus, as a percentage of GDP, is needed to keep the debt ratio stable?
The required primary surplus is 1.6% of GDP. It equals the debt ratio times the gap between the interest rate and nominal growth, which is 0.80 times 2 percentage points. Using the interest rate alone would overstate the requirement at 4.0%.
- A1.6%Correct
- B2.4%
- C4.0%
- D0.8%
Explanation
Stabilising primary surplus = d x (r - g) = 0.80 x (0.05 - 0.03) = 1.6% of GDP. Using only r gives 4.0%, using only g gives 2.4%, and 0.8% is a computational slip that halves the result.
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