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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

From 2008 to 2012, the ratio of government debt to GDP in the United States

a. increased markedly.

b. decreased markedly.

c. was stable at a historically high level.

d. was stable at a historically low level.

To determine

The relation of Government debt to GDP from 2008 to 2012.

Explanation

The GDP is the summation of the money value of all the goods and services produced within the political boundary of a country in a financial year. There are two different ways of calculating the GDP of the economy, and they are the Real GDP and the Nominal GDP. The Real GDP is the GDP calculated at the constant prices. The government debt is the debt that is owned by the government. The debt to GDP ratio shows us what is the ratio between the size of the debt owned by the government to the GDP of the economy.

Option (a):

The year 2007 triggered off the financial Crisis in the economy, and the after effects of the financial crisis were finally resolved past the year 2012. Thus, in order to recover the economy from the crisis, the government had to spend more money. The tax revenue was very low due to the financial crisis and this increased the spending over the revenue. Thus, the government had to resort on the debt and as a result, the Debt-to-GDP ratio of the economy increased markedly from 2008 to 2012. So, option 'a' is correct.

Option (b):

The year 2007 triggered off the financial Crisis in the economy, and the government had to pass the bailout packages and many social security acts that increased the government spending over the government revenue...

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