Question

What are two ways the debt-to-GDP ratio can increase?

Answer 1

Answer:

C. GDP decreases

D. Debt increases

Answer 2

Answers: choice C and choice D

The ratio can be thought of as a fraction. Let's say that a country is $100 in debt and has a GDP of $50. These are simplified smaller numbers of course just for the purpose of an example. The debt-to-GDP ratio would be debt/GDP = 100/50 = 2 meaning that for each dollar of GDP, there are 2 dollars of debt. Put another way, the amount of debt is double that of GDP.

Let's say that debt goes up but GDP says the same. Let's make debt jump up $50 to get to $150 in debt. The ratio is now 150/50 = 3. So the ratio has gone up (from its previous value of 2). This example shows how choice D is true.

Now let's consider debt staying the same but GDP going down. If we drop the GDP from 50 to 25, then the ratio is: 100/25 = 4 and we see the ratio has gone up (from the previous value of 2). This shows how choice C is true.

Note: If scenario C and scenario D happen at the same time, then the ratio would also go up.