Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 5 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest possible deficit it can have without raising the debt-to-income ratio?
A) just under 3 billion units
B) just under 5 billion units
C) just under 8 billion units
D) just under 15 billion units

Question

Quizplus · Accepted Answer

The debt-to-income ratio is the ratio of the country's total debt to its nominal GDP. Since the country's nominal GDP is about 100 billion units of currency, the highest possible deficit it can have without raising the debt-to-income ratio can be calculated as follows:
Highest possible deficit = (nominal GDP x real growth rate) - nominal GDP x inflation rate
= (100 billion x 0.05) - (100 billion x 0.03)
= 5 billion - 3 billion
= 2 billion
Therefore, the highest possible deficit is just under 8 billion units, which is the closest option.

Suppose That a Country Has an Inflation Rate of About