Practice question · True or false
A country running a budget deficit must see its public debt rise as a share of GDP.
Hints
- What is the denominator doing?
- Debt is a stock; the ratio has two moving parts.
Show the answer
False
Why
False. The ratio falls whenever nominal GDP grows faster than debt, so a country can run a deficit and still deleverage, which is how much of the post-1945 debt burden was reduced. The condition is that growth plus inflation exceed the effective interest rate, not that the deficit be zero.
Practise Fiscal Policy
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More questions on Fiscal Policy
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