Concept:The Credit/GDP ratio is the best indicator to track the financial cycle because it measures the total credit in the economy relative to its size, capturing self-reinforcing expansions or contractions of borrowing and lending.
Explanation:- The financial cycle involves interactions between risk perception, asset values, and credit growth.
- Credit/GDP ratio effectively captures systemic risk – a rapidly rising ratio signals excessive debt and potential asset bubbles.
- It helps distinguish healthy financial deepening from dangerous credit booms that may lead to banking crises.
- International banking rules (Basel III) use the Credit-to-GDP gap (difference from long-term trend) to decide when banks must build countercyclical capital buffers.
- Other options are wrong:
- Tax/GDP ratio measures fiscal revenue, not financial cycle.
- Fiscal Deficit/GDP ratio shows government borrowing, not private credit cycles.
- Household Consumption/GDP ratio is part of business cycle, not financial cycle.
Answer:D. Credit/GDP Ratio