(A)Explain the Distinction Between the Nominal Deficit and the Real

question 12

Essay

(a)Explain the distinction between the nominal deficit and the real deficit.Explain why inflation wipes out debt.
(b)Demonstrate your understanding of this relationship by calculating the real deficit from the figures in the examples given below:
#1: Nominal deficit = $8 million; Inflation = 5%; Total debt = $100 million
#2: Nominal deficit = $8 million; Inflation = 8%; Total debt = $100 million
#3: Nominal deficit = $8 million; Inflation = 8%; Total debt = $200 million

---

Definitions:

Diminishing Returns

A principle stating that as investment in a single area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other inputs remain constant.

Marginal Product

The additional output generated by employing one more unit of a particular input, holding all other inputs constant.

Hiring Labor

The process of engaging individuals to perform services or work for compensation.

Stock Prices

The current market price of a share of a company's stock, reflecting investor perceptions of the company's future financial prospects.