Suppose that a country has an inflation rate of about 5 percent per year and a real GDP growth rate of about 2 percent per year.What is the highest deficit the government can afford without raising the debt-to-income ratio?
A) about 2 percent of GDP
B) about 7 percent of GDP
C) about 9 percent of GDP
D) about 12 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 real GDP growth rate and the inflation rate, which is 2% + 5% = 7%.

Suppose That a Country Has an Inflation Rate of About