Suppose that at the start of fiscal year 2010 the government had a debt of $6126.5 billion. Suppose that during the same fiscal year real GDP grew by about 3 percent and inflation was about 1 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?
A)about $122 billion
B)about $184 billion
C)about $245 billion
D)about $375 billion

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio remains constant if the deficit equals the growth in nominal GDP. With real GDP growth of 3% and inflation of 1%, nominal GDP grows by 4%. Therefore, the largest deficit that maintains the debt-to-GDP ratio is 4% of $6126.5 billion, which is approximately $245 billion.

Suppose That at the Start of Fiscal Year 2010 the Government