Assume that a country's real growth is 2 percent per year, while its real deficit is rising 5...

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Assume that a country's real growth is 2 percent per year, while its real deficit is rising 5 percent a year. Can the country continue to afford such deficits indefinitely? What problems might it face in the future?
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Robert · Accepted Answer

Assume that a country's real growth is 2 percent per year, while its real deficit is rising 5 percent a year. Can the country continue to afford such deficits indefinitely? What problems might it face in the future?
Answer:
Deficit is associated with the budget i.e. government spending. Now, the government spending is expressed as percentage of budget. 5% deficit is having 2% of GDP and is stable but not good because it does not face the unforeseen economic shocks. The problem it might in the future are:-
1) Instability of the system – In 1980s most of UK refused to join the exchange rate mechanism. It would not be possible in maintaining the stability in the exchange within the exchange rate mechanism, in the early 1980s when pound was considered as petro-currency and when UK inflation rate was consistent is higher that of Germany. In 1990, when UK joined the exchange rate mechanism there were three years of relative stability in the currency in Europe and looked when the system become relatively strong. In 1992, when UK and Italy left the system that showed the system was very less strong that thought.

Assume that a country's real growth is 2 percent per year, while its real deficit is rising 5 percent a year. Can the country continue to afford such deficits indefinitely? What problems might it face...

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