Question

Suppose that over the past 50 years, the nominal and real deficit of a country grew from $100 billion to $200 billion. Suppose that, over the same time, real GDP grew from $100 billion to $300 billion. Using _______, we can give an accurate picture of what happened in the country and conclude that the country is _______.

A) Nominal deficits; worse off
B) Real deficits; better off
C) Deficit-to-GDP ratio; worse off
D) Deficit-to-GDP ratio; better off

Answer 1

The deficit-to-GDP ratio is used to assess what happened in the country over the past 50 years, and in this case, since the ratio has improved, the country is better off.

Step-by-step explanation:

D) Deficit-to-GDP ratio; better off

In order to accurately assess what happened in the country over the past 50 years, we need to use the deficit-to-GDP ratio. The deficit-to-GDP ratio compares the country's deficit (the amount the government has borrowed in one particular year) to the country's real GDP (the total value of all final goods and services produced in the country at constant prices). By looking at the deficit-to-GDP ratio, we can determine whether the country is better off or worse off. In this case, since the deficit has grown from $100 billion to $200 billion while real GDP grew from $100 billion to $300 billion, the ratio has improved and the country is better off.