Suppose that the country of Aquilonia has an inflation rate of about 5 percent per year and a real growth rate of about 5 percent per year. Suppose also that it has nominal GDP of about 200 billion units of currency and current nominal national debt of 150 billion units of domestic currency. Which of the following government spending and taxation figures will not raise the debt-to-income ratio?

Question

Quizplus · Accepted Answer

To maintain the debt-to-income ratio, the government must ensure that the deficit (government spending minus tax collections) does not exceed the nominal GDP growth rate. With a 5% inflation rate and a 5% real growth rate, nominal GDP grows by 10% annually. Option A has a deficit of 50 - 76 = -26 billion, which means a surplus, thus reducing the debt-to-income ratio.

Suppose That the Country of Aquilonia Has an Inflation Rate