At the end of 2010, the government had a debt of about $9.4 trillion. If during 2011 real GDP were to rise 3% and inflation was 2%, what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio remains constant if the debt grows at the same rate as nominal GDP. With real GDP rising by 3% and inflation at 2%, nominal GDP grows by 5%. Therefore, the government could run a deficit of 5% of $9.4 trillion, which is about $470 billion, without increasing the debt-to-GDP ratio.

At the End of 2010, the Government Had a Debt