Unlike households, governments are often able to sus-tain large debts. For example, in 2013, the U.S. govern-ment's total debt reached $17.3 trillion, approximatelyequal to 101.6% of GDP. At the time, according to the U.S. Treasury, the average interest rate paid by the government on its debt was 2.0%. However, running budget deficits becomes hard when very large debts are
outstanding.
a. Calculate the dollar cost of the annual interest on the government's total debt assuming the interest rate and debt figures cited above.
b. If the government operates on a balanced budget before interest payments are taken into account, at what rate must GDP grow in order for the debt-GDP ratio to remain unchanged?