FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust
A sovereign has debt of 100% of GDP, an average interest rate of 4%, and nominal GDP growth of 2%. Ignoring the (1+g) denominator and using the approximation that the required primary surplus equals (r - g) times the debt ratio, what primary surplus, as a percent of GDP, is needed to keep the debt ratio stable?
The sovereign needs a primary surplus of about 2% of GDP. To stabilise the ratio, the surplus must offset the excess of the interest rate over nominal growth applied to the debt stock: (4% minus 2%) times 100% of GDP equals 2% of GDP.
- A2.0%Correct
- B4.0%
- C6.0%
- D1.0%
Explanation
Required primary balance = (r - g) × d = (4% - 2%) × 100% = 2% of GDP. Using r alone gives 4%, which ignores growth eroding the ratio. Adding r and g gives 6%, a sign error.
Did you get it right without looking?
One question tells you little. A timed set on Monetary and Fiscal Policy: Safeguarding Stability and Trust shows your real accuracy, how long you take and where you lose marks.
More Monetary and Fiscal Policy: Safeguarding Stability and Trust questions
- A central bank buys long-dated government bonds from the market and pays for them by creating bank reserves, with the stated aim of lowering…
- A central bank buys long-dated government bonds from the market and pays for them by creating bank reserves, with the aim of lowering long-t…
- A central bank is concerned about 'fiscal dominance'. Which situation best illustrates it?
- A country's government debt is 90% of GDP. The average interest rate on that debt is 3%, nominal GDP growth is 5%, and the primary balance i…
- A risk manager at a bond fund notes that a central bank has raised rates to fight inflation while the government continues large deficits fi…
- A central bank has held a very large bond portfolio financed by interest-bearing reserves after years of QE. It now raises its policy rate s…