If in some year,real GDP rises by 4% and inflation is 3%,then the budget deficit could grow as much as

Question

Quizplus · Accepted Answer

The budget deficit is the difference between government spending and revenue. In this case, if real GDP rises by 4%, that means the government can expect an increase in tax revenue. However, if inflation is also 3%, then prices are rising and therefore so are the costs of government spending.

Therefore, the government can only increase the budget deficit without raising the ratio of debt to GDP by a certain percentage. This percentage would be equal to the difference between the growth rate of GDP and the inflation rate. In this case, that would be 1% (4% - 3%).

So, the budget deficit could grow by a maximum of 1% without raising the ratio of debt to GDP. That would be $200 billion, assuming a current GDP of $20 trillion. A growth of 7% as in option B would be excessive and would increase the ratio of debt to GDP.

If in Some Year,real GDP Rises by 4% and Inflation