Suppose that at the start of fiscal year 2013 the government had a debt of $6300 billion.Suppose that during fiscal year 2015,real GDP grew by about 4 percent and inflation was about 3 percent.What is the largest deficit the government could have run without raising the debt-to-GDP ratio?
A) about $184 billion
B) about $375 billion
C) about $441 billion
D) about $632 billion

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio remains constant if the deficit is equal to the growth in nominal GDP. With real GDP growth of 4% and inflation of 3%, nominal GDP growth is 7%. Therefore, the largest deficit that maintains the debt-to-GDP ratio is 7% of $6300 billion, which is approximately $441 billion.

Suppose That at the Start of Fiscal Year 2013 the Government