Debt Ratio - Worksheet

There is one worksheet available about the debt ratio. The worksheet looks at what determines the value of the debt ratio and why it changes. It then goes on to suggest some experiments with the Virtual Economy model to see how it reacts to different policy changes.

There is also a printable version of this worksheet available for classroom or personal use with spaces to fill in the answers.

Step 1 - How indebted are we?

What is meant by national debt? (You may find the debt ratio theory section or the glossary helpful.)

What is the relationship between the PSNCR and the national debt? (Again the theory section or glossary may help.)

The debt ratio is equal to:

If the level of national debt stays the same and GDP rises, what will happen to the debt ratio?

If the level of national debt stays the same and GDP falls, what will happen to the debt ratio?

To see what is expected to happen to the debt ratio in the future, go to the model and make a small policy change (say a 1 percentage point tax cut). From the output page note down what is expected to happen to the debt ratio, PSNCR and economic growth both before and after the policy change:

What relationship is evident between these three variables? Is it as you predicted above? (Refer in detail to the figures in your answer.)

Step 2 - More or less debt?

What problems might be caused for an economy by a significantly higher debt ratio?

What changes in the governments fiscal policy might lead to a higher debt ratio?, Government expenditure changes?, Taxation changes?

Now try these policies on the model , and note down the effects below:

How much did the debt ratio rise over the 10 years? (If it didn't rise very much, go back and try increasing it further.)

What other problems have these policies caused for the economy?