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At the end of 2007, the government had a debt of about $5,000 billion. During 2007,...

At the end of 2007, the government had a debt of about $5,000 billion. During 2007, real GDP grew by about 0.8 percent and inflation was about 2.7 percent. About what is the largest deficit the government could have run without raising the debt-to-GDP ratio? a. 135 billion b. 143 billion c. 169 billion d. 175 billion

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Answer #1

Solution: 175 billion

Working: Highest deficit the government could have run without increasing the debt-to-GDP ratio:

Debt * (real GDP % + inflation %)

= 5,000 (0.8% + 2.7%)

= 175 billion

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