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Suppose that the debt to GDP ratio in a hypothetical country reaches 200%.

Suppose that the debt to GDP ratio in a hypothetical country reaches 200%. For many years, investors had been 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. As a result, the investors are now willing to lend to the government only if they receive a high interest rate of 20%. (Several years before Argentina defaulted on its debt, investors demanded interest rates on its debt of more than 20% per year, so 20% is not an unrealistic number.)

Suppose that debt is equal to 180 trillion ducats and GDP is equalto 90 trillion ducats. If interest payments are equal to the interest accrued in a given year, how much would the government'sin terest payments on its debt be as a percentage of GDP?

A. 4%

B. 20%

C. 12%

D. 2%

E. 40%

Jun 08 2018 View more View Less

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