suppose that the country of A has an inflation rate of about 2 percent per year

Question

suppose that the country of A has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 400 billion units of currency and current nominal national debt of 200 billion units of domestic currency. Which of the following government spending and taxation figures will keep the debt to -income ratio constant? A government spending equal to 30 billion units and tax collections equal to 25 billion units. B government spending equal to 30 billion units and tax collections equal to 20 billion units. C government spending equal to 30 billion units and tax collections equal to 10 billion units. D government spending equal to 30 billion units and tax collections equal to 5 billion units.

Explanation / Answer

Current debt to income ratio = 200/400=0.50

GDP new = 400*1.05=420

Debt to income ratio = 0.50

debt/420=0.50

debt = 210 so increase of 10.

This makes B option correct as it will result in 10 more debt.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.