Suppose that in fiscal year 2010 the government ran a deficit of about $160 billion. The debt at the start of this period was about $6126 billion. Which of the following combinations of inflation and real GDP would have allowed the government to run a deficit this large without raising the debt-to-income ratio?

Question

Quizplus · Accepted Answer

To keep the debt-to-income ratio constant, nominal GDP must grow at least as fast as the debt. With a 2% inflation and 1% real GDP growth, nominal GDP grows by 3%, which is sufficient to offset the deficit without increasing the debt-to-income ratio.

Suppose That in Fiscal Year 2010 the Government Ran a Deficit