Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $4 trillion while raising only $3 trillion 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 4 percent rate of interest, how much interest will the government pay each year? (d) Add the interest payment to the government's $4 trillion expenditures for the next year, and assume that tax revenues remain at $3 trillion. In the second year, compute: (i) the deficit; (ii) the amount of new debt (bonds) issued to finance the deficit in the second year; (iii) the total debt at the end of the second year; and (iv) the debt service requirement. Express all money figures in billions of dollars.
Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $4 trillion while raising only $3 trillion 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 4 percent rate of interest, how much interest will the government pay each year? (d) Add the interest payment to the government's $4 trillion expenditures for the next year, and assume that tax revenues remain at $3 trillion. In the second year, compute: (i) the deficit; (ii) the amount of new debt (bonds) issued to finance the deficit in the second year; (iii) the total debt at the end of the second year; and (iv) the debt service requirement. Express all money figures in billions of dollars.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Suppose a government has no debt and a balanced budget. Suddenly it decides to
spend $4 trillion while raising only $3 trillion 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 4 percent rate of interest, how much
interest will the government pay each year? (d) Add the interest payment to the
government's $4 trillion expenditures for the next year, and assume that tax
revenues remain at $3 trillion. In the second year, compute: (i) the deficit; (ii) the
amount of new debt (bonds) issued to finance the deficit in the second year; (iii) the
total debt at the end of the second year; and (iv) the debt service requirement.
Express all money figures in billions of dollars.
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