Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $5 trillion while raising only $4 trillion worth of taxes. Instructions: Round your responses to one decimal place. a. What will be the government’s deficit?
Answer part D)
Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $5 trillion while raising only $4 trillion worth of taxes.
Instructions: Round your responses to one decimal place.
a. What will be the government’s deficit?
$____billion
b. If the government finances the deficit by issuing bonds, what amount of bonds will it issue?
$ ______ billion
c. At a 3 percent rate of interest, how much interest will the government pay each year?
$ ________ billion
d. Add the interest payment to the government’s $5 trillion expenditures for the next year, and assume that tax revenues remain at $4 trillion. In the second year, compute the
(i) Deficit.
$ _________ billion
(ii) Amount of new debt (bonds) issued to finance the deficit in the second year.
$ ________ billion
(iii) Total debt at the end of the second year.
$ __________ billion
(iv) Debt service requirement.
$ _______billion
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