Suppose that a country has an inflation rate of about 4 percent per year and a real GDP growth rate of about 3 percent per year.What is the highest deficit the government can afford without raising the debt-to-income ratio?
A)about 12 percent of GDP
B)about 7 percent of GDP
C)about 5 percent of GDP
D)about 1 percent of GDP

Question

Quizplus · Accepted Answer

The highest sustainable deficit without increasing the debt-to-GDP ratio is approximately equal to the sum of the inflation rate and the real GDP growth rate, which is 4% + 3% = 7%.

Suppose That a Country Has an Inflation Rate of About