Suppose that a country has an inflation rate of about 3 percent per year and a real growth rate of about 6 percent per year. Suppose also that it has nominal GDP of about 100 billion units of currency. What is the highest deficit it can have without raising the debt-to-income ratio?
A)just under 1 billion units
B)just under 3 billion units
C)just under 6 billion units
D)just under 9 billion units

Question

Quizplus · Accepted Answer

The nominal GDP growth rate is the sum of the real growth rate and the inflation rate, which is 9% (6% real growth + 3% inflation). To keep the debt-to-income ratio constant, the deficit should not exceed the nominal GDP growth rate, which is 9% of 100 billion, equating to just under 9 billion units.

Suppose That a Country Has an Inflation Rate of About