At the end of 2003,the government had a debt of about $3,924 billion.During 2004,real GDP grew by about 4.2 percent and inflation was about 2.6 percent.About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Question

Quizplus · Accepted Answer

To calculate the largest deficit the government could have run without raising the debt-to-GDP ratio, we need to use the following formula:
Largest deficit = (Debt at the end of the year * (1 + GDP growth rate)) - Debt at the end of the year
Using the values given in the problem, we get:
Largest deficit = ($3,924 billion * (1 + 0.042)) - $3,924 billion
Largest deficit = $267.288 billion
Therefore, the largest deficit the government could have run without raising the debt to GDP ratio is about $267 billion, which is closest to option B.

At the End of 2003,the Government Had a Debt of About