In which of the following situations does the government NOT need to balance its budget?
A) if nominal GDP grows faster than the growth in debt
B) if nominal GDP grows slower than the growth in debt
C) if inflation is zero
D) if inflation is higher than the growth in debt

Question

Quizplus · Accepted Answer

As long as the nominal GDP growth rate is higher than the growth rate of debt, the government can run a deficit and still maintain a stable debt-to-GDP ratio. In other words, the government does not need to balance its budget in this situation. B, C, and D are incorrect because a slower GDP growth rate, zero inflation, or higher inflation than the growth in debt do not necessarily imply that the government does not need to balance its budget.

In Which of the Following Situations Does the Government NOT