The difference between the official and correct measures of the deficit will be greater:
A) the lower is output growth.
B) the lower is inflation.
C) the higher is inflation.
D) the higher is output growth.
E) the lower is the level of debt.

Question

Quizplus · Accepted Answer

The official measure of the deficit is calculated by subtracting government spending from government revenue, without taking into account the effects of inflation. The correct measure of the deficit, on the other hand, adjusts for inflation by using constant dollars, which gives a more accurate representation of the real value of the deficit. When inflation is high, the difference between the two measures will be greater, as the official measure will understate the true size of the deficit due to the effects of inflation. Therefore, the correct answer is C, as the difference between the official and correct measures of the deficit will be greater the higher inflation is.

The Difference Between the Official and Correct Measures of the Deficit