Suppose that in fiscal year 2015 the government ran a deficit of about $249 billion.The debt at the start of this period was about $5971 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

The debt-to-income ratio remains constant if the nominal GDP growth rate (sum of inflation and real GDP growth) is equal to or greater than the deficit-to-debt ratio. In option C, the nominal GDP growth rate is 4% (3% inflation + 1% real GDP growth), which is greater than the deficit-to-debt ratio of approximately 4.17% ($249 billion deficit / $5971 billion debt).

Suppose That in Fiscal Year 2015 the Government Ran a Deficit