In Year 1, the economy goes into recession with nominal GDP growth falling to minus -1 per cent for the year. The inflation rate is subdued at 1 per cent per annum. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The governments primary budget deficit is recorded as 1 per cent of GDP and the debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and pushes the budget deficit (net of interest payments) out to 2 per cent of GDP. This discretionary fiscal decision stimulates aggregate demand and the economy recovers with a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the rate of increase in the debt ratio will fall by an amount less than the rise in the budget deficit because of the real growth in the economy.
Answer: False