1. Consider an economy A where:  Debt-to-DGP equals 100% of GDP  The primary deficit is 4% of GDP  The normal growth is 3%  The real interest rate is 3%. a) Confirm that by reducing the primary deficit to 1% for 10 years will produce a debt-to-GDP ratio of 110% in 10 years. Thereafter, what value of the primary deficit will be required to maintain the debt-to-GDP ratio at 110%? b) Continuing with part-a, suppose that policy makers wait five years before changing fiscal policy. For five years the deficit remains at 4% of GDP. What is the debt-to-GDP ratio in 5 years? Assume that after 5 years the policy makers decide to reduce the debt-to-GDP ratio to 100% by year-10. In years 6 through 10, what constant value of the primary deficit will produce a debt-to-GDP ratio of 100% at the end of year 10? c) Suppose that policy makers carry out the policy in part (b). If these policies reduce the growth rate of output down to 2 per cent in years 6 through 10, how will this affect the size of the reduction in the primary deficit required to achieve a debt-to-GDP ratio of 100% in 10 years. d) Suppose that policy makers carry out the policy in part (b). If these policies reduce the growth rate of output down to 1 per cent in years 6 through 10, how will this affect the size of the reduction in the primary deficit required to achieve a debt-to-GDP ratio of 100% in 10 years. Which policy – the one in part (a) or part (b) – do you think is more dangerous to the stability of the economy?