Suppose that nominal GDP equals $15 trillion, the current budget deficit is $600

Question

Suppose that nominal GDP equals $15 trillion, the current budget deficit is $600 billion, and the net public debt/GDP ratio is 80 percent. Given that the government wishes to maintain the net public debt/GDP ratio at 80 percent, explain whether the government needs to decrease its budget deficit, maintain the current budget deficit, or can increase its budget deficit if, over the next year, nominal GDP grows by: (i), 4 percent; (ii), 5 percent; and (iii), 6 percent. If the government either needs to cut its deficit or can increase it, explain by how much in each case

Explanation / Answer

1) 4% = increase deficit to 624 bn

2) 5% = increase to 630bn

3) 6% = increase to 636

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