Suppose That a Country Has an Inflation Rate of About

question 113

Multiple Choice

Suppose that a country has an inflation rate of about 5 percent per year and a real GDP growth rate of about 2 percent per year.What is the highest deficit the government can afford without raising the debt-to-income ratio?

• A) about 2 percent of GDP
• B) about 7 percent of GDP
• C) about 9 percent of GDP
• D) about 12 percent of GDP

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Definitions:

Manufacturing Overhead

This refers to all of the indirect costs associated with the production process, such as utilities, maintenance, and salary of supervisors.

Predetermined Overhead Rate

A rate calculated at the beginning of the accounting period, based on the estimated overhead costs and estimated activity level, used to allocate overhead costs to products.

Overhead Applied

Refers to the amount of manufacturing overhead costs assigned to individual jobs based on a predetermined rate, representing the indirect costs associated with production.

Actual Overhead Costs

The real expenses incurred for overhead in a specific period, as opposed to budgeted or estimated costs.