1 Suppose the federal government has no national debt and sp

1. Suppose the federal government has no national debt and spends $100 billion, while raising only $50 billion in taxes.

a. What amount of government bonds will the U.S. Treasury issue to finance the deficit?

b. Next year, assume tax revenues remain at $50 billion. If the government pays a 10 percent rate of interest, add the debt-servicing interest payment to the government’s $100 billion expenditure for goods and services the second year.

c. For the second year, compute the deficit, the amount of new debt issued, and the new national debt.

2. Suppose the media report that the federal deficit this year is $200 billion. The national debt was $5,000 billion last year, and it is $5,200 billion this year. The price level this year is 3 percent higher than it was last year. What is the real deficit?

3. During the presidential campaign of 1932 in the depth of the Great Depression, candidates Herbert Hoover and Franklin D. Roosevelt both advocated reducing the budget deficit, using tax hikes and/or expenditure reductions. Evaluate this fiscal policy.

4.

Solution

Ans. 1 (A) $100 billion expenditure, out which $50 billion is financed by tax revenue, other $50 billion will be financed by bonds

(B) Interest on bonds= 10% on $50 billion worth of bonds= 10/100 x 50 = $5 billion.

(C) So, the total expenditure is equal to $100 biliion + 5 billion interest payment = $105 billion.

Govt budget deficit = Govt exp - tax = $105- $50= $55 billion.

Total debt = $50 billion of bonds + 5 billion interest payments = $55 billion

Ans 2. Already correct answer given by previous user.