If a $6 billion economy is growing at a real rate of 5 percent a year and there is no inflation, what must the government do to maintain a constant debt-to-GDP ratio?

Question

Quizplus · Accepted Answer

To maintain a constant debt-to-GDP ratio in an economy growing at a real rate of 5 percent per year, the government can afford to run a deficit that is equal to the growth rate of the economy in dollar terms. Since the economy is $6 billion and growing at 5%, the growth in dollar terms is $300 million (5% of $6 billion). Therefore, the government can run a deficit of $300 million without altering the debt-to-GDP ratio.

If a $6 Billion Economy Is Growing at a Real