Assume that the debt-to GDP ratio is 60%, the inflation rate is 2.0% and the total budget deficit is 3% of GDP.What is the inflation-adjusted budget deficit as a percentage of GDP?
A)2)4%
B)1).8%
C)1)5%
D)1)2%
E)1)0%

Question

Quizplus · Accepted Answer

To calculate the inflation-adjusted budget deficit, we need to subtract the inflation rate (2%) from the total budget deficit (3%), and then divide by (1+inflation rate), raised to the power of -1. Using this formula:
(3% - 2%) / (1 + 2%)^-1 = .8%
So the inflation-adjusted budget deficit is .8% of GDP. Therefore, the correct choice is B).

Assume That the Debt-To GDP Ratio Is 60%, the Inflation