Suppose that real GDP is 10,000 and remains constant, nominal GDP is initially 30,000, inflation is 3%, and the debt-GDP ratio is 0.7. Find the largest nominal deficit that the government can run without raising the debt-GDP ratio.
What will be an ideal response?
change in debt/GDP = deficit/GDP - (debt/GDP × growth rate)
0 = deficit/30,000 - (0.7 × .03)
.021 = deficit/30,000
deficit = .021 × 30,000 = 630.
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