At the end of 2010, the government had a debt of about $9.4 trillion. If during 2011 real GDP were to rise 3.2% and inflation were 1.6%, what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

Question

Quizplus · Accepted Answer

The nominal GDP growth rate is the sum of real GDP growth and inflation, which is 4.8% (3.2% + 1.6%). The largest deficit that can be run without increasing the debt-to-GDP ratio is 4.8% of the initial debt, which is $9.4 trillion * 4.8% = $451.2 billion.

At the End of 2010, the Government Had a Debt