In an economy with a constant cash deficit of 4 percent of GDP, a long-run inflation rate of 2% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,

Question

Quizplus · Accepted Answer

The equilibrium debt-to-GDP ratio is determined by the deficit-to-GDP ratio divided by the growth rate of nominal GDP. The nominal GDP growth rate is the sum of the inflation rate, labor force growth rate, and growth rate of output per worker, which is 2% + 2% + 1% = 5%. Therefore, the equilibrium debt-to-GDP ratio is 4% / 5% = 4/5.

In an Economy with a Constant Cash Deficit of 4