Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year. Then the government can have a deficit of about

Question

Quizplus · Accepted Answer

The government can have a deficit of up to the difference between the real GDP growth rate and the inflation rate without raising the debt-to-income ratio. In this case, that would be 3 percent minus 2 percent, which equals 1 percent of GDP. Therefore, the government can have a deficit of up to 5 percent of GDP (1 percent + 4 percent) without raising the debt-to-income ratio. Therefore, the answer is B.

Suppose That a Country Has an Inflation Rate of About