Consider an economy characterized by the following facts:
i. The official budget deficit is 4% of GDP.
ii. The debt-to-GDP ratio is 100%.
iii. The nominal interest rate is 10%.
iv. The inflation rate is 7%.
a. What is the primary deficit/surplus ratio to GDP?
b. What is the inflation-adjusted deficit/surplus ratio to GDP?
c. Suppose that output is 2% below its natural level. What is the cyclically adjusted, inflation-adjusted deficit/surplus ratio to GDP?
d. Suppose instead that output begins at its natural level and that output growth remains constant at the normal rate of 2%. How will the debt-to-GDP ratio change over time?