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MACROECONOMICS
ratio implies that the debt will never be repaid and
b
t
will not tend to zero. Instead,
the debt/GDP ratio will tend towards
_
b
,
b
t
→
_
b
, and the government would be
insolvent in the sense that it never repays the principal sum of debt borrowed.
In the case of panel B in Figure 12.2, where
r
g
, the GDP is growing at a
slower rate than the interest rate and the debt/GDP ratio increases over time.
Eventually debt will be larger than GDP and the debt is so large that the entire
GDP is insufficient to pay the interest on the debt. The government will even-
tually become bankrupt. In practical terms, ...
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