A country has a growth rate of 3%.Government spending is 60 billion units of currency and its tax revenues are 32 billion units of currency.The current national debt is 400 billion units of currency.At which inflation rate is its debt-to-income ratio unchanged?

Question

Quizplus · Accepted Answer

The debt-to-income ratio remains unchanged when the nominal growth rate (real growth rate + inflation rate) equals the interest rate on the debt. Here, the real growth rate is 3%, so an inflation rate of 4% would result in a nominal growth rate of 7%, which would keep the debt-to-income ratio stable if the interest rate is also 7%.

A Country Has a Growth Rate of 3