When the government runs a deficit, it spends more than it collects in tax reven

Question

When the government runs a deficit, it spends more than it collects in tax revenue. to make up the difference, it borrows. So if it runs a deficit of 7 trillion ducats, debt increases by 7 trillion ducats. So debt next year is 147 trillion ducats. Suppose that there is no growth in real GDP and inflation is equal to -2% per year. (negative inflation is the same as deflation) Next years GDP will be equal to ___________ trillion ducats.

If the ratio of debt to GDP is 1.4 this year, the ratio of debt to GDP next year when inflation is equal to -2% per year will be ____________?

1.3, 1.4, 1.5 1.6 or 1.7???

Suppose that the deficity remains constant at 7% of GDP and that inflation persisits at -2%. The debt to GDP ratio the year after next will be ____________? 1.3, 1.4, 1.5, 1.6 or 1.7???

Explanation / Answer

Answer 1:

The value of GDP next year = 98 trillion ducats . It is given by 100 trillion ducats - .02 * 100 trillion ducats = 98 trillion ducats.

Answer 2:

Debt to GDP ratio is 1.3 per cent. It is given by 147 / 98 = 1.5

Answer 3:

The answer is 1.6 it is calculated in the following manner:

New Debt = 147 + .07 * 98= 153.86

New GDP = 98-.02 * 98 = 96.04

New Debt to GDP ratio = 153.86 / 96.04 = 1.6.

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