Suppose a government has no debt and a balanced budget. Suddenly it decides to s

Question

Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $10 billion while raising only $8 billion worth of taxes.

a) What will be the government's deficit?

b) If the government finances the deficit by issuing bonds, what amount of bonds will it issue?

c) At a 10 percent rate of interest, how much interest will the government pay each year?

d) If this same budget deficit occurs for a second year, what would the national debt become? And at a 10 percent rate of interest, now how much interest would have to be paid by the government each year?

Explanation / Answer

Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $10 billion while raising only $8 billion worth of taxes.

a) What will be the government's deficit?

$10 billion-$8 billion=$2 billion

=====================================================================

b) If the government finances the deficit by issuing bonds, what amount of bonds will it issue?

$2 billion
=====================================================================
c) At a 10 percent rate of interest, how much interest will the government pay each year?

=10% x$2 billion= $ 0.2 billion

=====================================================================
d) If this same budget deficit occurs for a second year, what would the national debt become? And at a 10 percent rate of interest, now how much interest would have to be paid by the government each year?

second year deficit =2.2 billion

=====================================================================

2.2 billion

0.22 billion

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.