Now suppose that the gross national debt initially is equal to $2.5 trillion and the federal government then runs a deficit of $100 billion:
i. What is the new level of gross national debt? The new gross national debt would be $2.5001 billion
ii. If 100 percent of this deficit is financed by the sale of securities to the public, what happens to the level of debt held by the public? What happens to the level of gross debt? The amount of debt held by the public and the gross national debt will be the same as the initial level.
iii. If GDP increases by 6 percent in the same year as the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP? The gross national debt would reduce by 6% as would the amount of public debt.