During a year, the government collects $2.8 trillion in revenue and spends $3.5

Question

During a year, the government collects $2.8 trillion in revenue and spends $3.5 trillion. The government’s gross debt at the beginning of the year was $17.1 trillion. The nation’s gross domestic product (GDP) during the year is $16.8 trillion. The inflation rate during the year is 1.5 percent.

What is the government’s nominal, or officially reported, deficit for the year? What is this deficit as a share of GDP?

What is the government’s debt at the end of the year? What is this end-of-year debt as a share of the year’s GDP?

What is the government’s real, inflation-corrected, deficit for the year?

Explanation / Answer

Government’s nominal or officially reported, deficit = revenue - spending = 2.8 - 3.5 = $ 0.7 trillions

Deficit % of gdp = 0.7/16.8 = 4.3%

Debt in the end = 17.1+0.7 = 17.8

Debt % of GDP = 17.8/16.8 = 106%

Government’s real, inflation-corrected, deficit = deficit/inflation = 0.7/(1+1.5%) = $0.68 trillion

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