question archive Suppose that a particular economy has a real GDP of 12

Suppose that a particular economy has a real GDP of 12

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Suppose that a particular economy has a real GDP of 12 .0 trillion in 2004. It grows to 15.0 trillion in 2005. meanwhile, the national debt was 8.0 trillion in 2004. In 2005 the Federal Government ran a budget deficit of 0.8 trillion, which was totally financed by borrowing. Given the set of circumstances the national debt as a percentage has:

a. Increased,

b. Decreased,

c. Doubled,

d. Remain constant.

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Let's compute the national debt as a percentage of Real GDP for both years.

National debt as a percentage of Real GDP = National Debt / Real GDP

2004:

National debt as a percentage of Real GDP = 8 trillion / 12 trillion

= 66.67%

2005:

National debt = 2004 National debt + debt-financed deficit

= 8.0 trillion + 0.8 trillion

= 8.8 trillion

National debt as a percentage of Real GDP = 8.8 trillion / 15 trillion

= 58.67%

The answer is thus b. Decreased.