Business, 28.05.2021 14:00 tishfaco5000
Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $5 trillion while raising only $4.5 trillion worth of taxes.
Instructions:
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 $5 trillion expenditures for the next year, and assume that tax revenues remain at $4.5 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
Answers: 3
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