Suppose That a Country Has an Inflation Rate of About

question 163

Multiple Choice

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 3 percent per year. Then the government can have a deficit of about

• A)6 percent of GDP without raising the debt-to-income ratio.
• B)5 percent of GDP without raising the debt-to-income ratio.
• C)1.5 percent of GDP without raising the debt-to-income ratio.
• D)1 percent of GDP without raising the debt-to-income ratio.

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Definitions:

Large Denomination Time Deposits

Time deposits in a bank or financial institution with a large minimum amount of money required, typically over $100,000, and a fixed term.

M2

A measure of the money supply that includes cash, checking deposits, and easily convertible near money, such as savings deposits, small time deposits, and money market mutual funds.

M3

A measure of the money supply that includes M2 plus large time deposits, institutional money market funds, and other larger liquid assets.

Reserve Ratio

The fraction of deposits that banks are required to hold in reserve and not lend out, aimed at controlling the money supply and banking stability.