Final answer:
Debt ratios will fall when the primary budget surplus exceeds the 'snowball' effect, which consists of compounding interest payments leading to increased debt. The control of this dynamic helps manage the debt/GDP ratio effectively.
Step-by-step explanation:
According to the debt accumulation equation, debt ratios will fall in cases where the primary budget surplus is greater than the "snowball" term. This is because when the government operates with a primary budget surplus, it means that its revenue, excluding interest payments on debt, is greater than its expenditures in a given period. If the surplus is sufficiently large to cover the interest payments, or what can be called a 'snowball' effect (where interest leads to growing debt), this reduces the overall debt ratio when compared to the size of the economy or GDP.
As the debt/GDP ratio includes both the debt level and the size of the economy as GDP, managing the primary budget effectively to create a surplus can help curb the growth of debt relative to the growth of the economy, leading to a declining debt ratio.
Interest payments on debt compounds the challenge of reducing debt ratios, as pointed out in Chapter 17, indicating that as debt increases, interest payments go up as well, potentially increasing the deficit even if other government spending remains constant. To avoid this, a government would need to maintain budget surpluses to pay down the debt or ensure that GDP growth outpaces debt growth.