Suppose that in fiscal year 2013 the government ran a deficit of about $160 billion.The debt at the start of this period was about $6126 billion.Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit this large without raising the debt-to-income ratio?
A)inflation = 2 percent; real GDP growth = 3 percent
B)inflation = 3 percent; real GDP growth = -1.5 percent
C)inflation = 2 percent; real GDP growth = 1 percent
D)inflation = 1.5 percent; real GDP growth = 1 percent

Question

Quizplus · Accepted Answer

The debt-to-income ratio is calculated by dividing the national debt by the Gross Domestic Product (GDP). In order for the government to run a deficit without increasing this ratio, the economy must grow at a rate that is faster than the rate at which the national debt is increasing. This means that the real GDP growth rate must be greater than the inflation rate.

Option C is the only combination where the real GDP growth rate (1%) is higher than the inflation rate (2%), so the government could have run a deficit of $160 billion without raising the debt-to-income ratio. Option A and D have the inflation rate lower than the real GDP growth rate, which could raise the debt-to-income ratio, while option B has a negative real GDP growth rate, which would definitely increase the debt-to-income ratio.

Suppose That in Fiscal Year 2013 the Government Ran a Deficit