Suppose the U.S. government began 2016 with no debt. The expenditures listed bel
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Question
Suppose the U.S. government began 2016 with no debt. The expenditures listed below do not include interest on debt.
2016: Spending on goods & services and transfers$4.5 trillion
tax receipts$4 trillion
What is the budget deficit? How much must the Treasury borrow?
2017: Expenditures and tax receipts both increase by 1% from the year before.
In addition, the debt incurred in 2016 has a 2% interest rate, which must be paid this year.
What is the budget deficit? How much must the Treasury borrow? What is its total debt?
2018: Spending and tax are same as 2017. Bonds issued in 2017 carry the same interest rate.
What is the budget deficit? How much must the Treasury borrow? What is its total debt?
2019: Spending is the same as 2018. But taxes increase 10% due to major expansion in macro-economy. Bonds issued in 2018carry the same interest rate. In addition, half of the (cumulative) Treasury bonds mature this year.
What is the budget deficit? How much must the Treasury borrow? How much in bonds must it issue?
Explanation / Answer
Budget Deficit= Government Total Expenditure - Government Total Income
2016-
Budget Deficit= $4.5 trillion- $ 4 trillion
= $ 0.5 trillion
Treasury must borrow $ 0.5 trillion.
2017-
Budget Deficit= 4.545 + 0.5(2%) - 4.02
= 0.515
The treasury must borrow = 0.515
Total debt= 0.5 + 0.515
= $ 1.015 trillion
2018-
Budget Deficit= 4.545 + 0.5(2%) - 4.02
= 0.515
Total debt= 0.5 + 0.515
= $ 1.015 trillion
2018-
Budget Deficit= 4.545 + 0.5(2%) - 4.02
= 0.515
The treasury must borrow = 0.515
Total debt= 0.5 + 0.515
= $ 1.015 trillion
2019-
Budget Deficit= 4.545 + 0.5(2%) - 4.442
= 0.113
Borrowed amount= 0.515
Bonds issue= 0.0565
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