Reference no: EM131112293

A recent report on GDP growth rates showed that the GDP of Dorada, a developed economy, has declined by 1.5 percent this year. Emily George and her friend Tabitha Jude, both students of economics, are discussing the possible reasons for the decline in the growth rate. Emily feels that the government deficit has reached an unsustainable level, as a result of which interest rates now are extremely high. This has reduced government expenditure in recent times, leading to a decline in GDP. Tabitha however disagrees. According to her, the fall in GDP must imply a fall in consumer spending as household consumption accounts for the largest share in Dorada's GDP. Which of the following, if true, will strengthen Emily's claim that the high fiscal deficit is affecting the government's ability to spend? A. The central government's grants-in0aid to the local governments increased by 7 percent. B. A sizeable portion of the tax revenue generated in Dorada is being used to make interest payments on sovereign debt. C. The President's economic advisory council is of the opinion that the fiscal deficit should not exceed 3 percent of the country's GDP. D. Given that the government of Dorada has never defaulted on sovereign debt, it enjoys very high credit ratings. E. The government of Dorada scaled up its defense expenditure by more than 50 percent in the last two years.