Suppose that at the start of fiscal year 2019 the government had a debt of $6220 billion. Suppose that during the same fiscal year, real GDP grew by about 3 percent and inflation was about 1 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio remains constant if the deficit is equal to the growth in nominal GDP. Nominal GDP growth is the sum of real GDP growth (3%) and inflation (1%), totaling 4%. Therefore, the largest deficit without raising the debt-to-GDP ratio is 4% of $6220 billion, which is about $249 billion.

Suppose That at the Start of Fiscal Year 2019 the Government