What will be the governments deficit

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Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $10 billion while raising only $8 billion 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 10 percent rate of interest, how much interest will the government pay each year?

d) If this same budget deficit occurs for a second year, what would the national debt become? And at a 10 percent rate of interest, now how much interest would have to be paid by the government each year?

Reference no: EM13837107

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