Suppose the U.S. government began 2016 with no debt. The expenditures listed bel

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 2018 carry 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

2016

Budget Deficit = Tax receipts - Spending on goods, services and transfers = $4 trillion - $4.5 trillion = (-)$0.5 trillion

Amount to be borrowed = $0.5 trillion

2017

Budget deficit = Tax receipts - spending - interest on debt = ($4 trillion + 1%) - ($4.5 trillion + 1%) - $0.5 trillion x 2%

Or, Budget deficit = (-)$0.515 trillion

Amount to be borrowed = $0.515 trillion

2018

Total borrowing = $0.5 trillion + $0.515 trillion = $1.015 trillion

Budget Deficit = ($4 trillion + 1%) - ($4.5 trillion + 1%) - $1.015 trillion x 2% = (-)$0.5253 trillion

Amount to be borrowed = $0.5253 trillion

2019

Total borrowing = $1.015 trillion + $0.5253 trillion = $1.5403 trillion

Budget Deficit = { ($4 trillion + 1%) + 10%} - ($4.5 trillion + 1%) - ($1.5403 x 2%) - ($1.5403 x 0.5) = (-)$0.901956 trillion or (-)$901.956 billion or (-)$901,956 million

Amount to be borrowed = $901,956 million

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.