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

The largest deficit that can be run without raising the debt-to-GDP ratio is equal to the growth rate of nominal GDP (real GDP growth + inflation) times the initial debt. Here, (4.2% + 2.6%) * $3,924 billion = $267 billion.

At the End of 2003, the Government Had a Debt