Question

A govermment has 7 trillion in debt (B). The real interest rate (r) is 3%. If the govemment spending on goods and services (G) during the year was 840 billion and taxes minus transfers (7) for the year was 715 billion, the change in govermment debt during the year was billion. (Enter your response as a whole number.) A government has 7 trillion in debt (B). The real interest rate (r) is 3%. If the government decided to stabilize the debt, then the government must run a primary surplus equal to A. 210 billion B. 2.1 billion C. 21 billion D. 2,100 billion

Answer 1

A government has 7 trillion debt and real interest rate is 3%.

Goods and services expenditure for the year is 840 billion and taxes minus transfers for the year is 715 billion. Therefore debt due to more expenditure than taxes is 840 billion - 715 billion = 125 billion.

Due to real interest rate of 3% the debt in 1 year will become 7 trillion +3% of 7trillion = 7000 billion +3% of 7000 billion = 7000 billion +210 billion = 7210 billion = 7.210 trillion.

Total debt including new debt of 125 billion is 7210 billion + 125 billion = 7335 billion. So change in government debt during the year is 7335 billion - 7000 billion = 335 billion.

The change in government debt during the year is 335 billion.

A government has 7 trillion in debt , the real interest rate is 3%. So, if the government decided to stabilize the debt the government must run a primary surplus equal to interest payment. Interest at 3% of 7 trillion debt is 3% of 7000 billion = 210 billion.

Therefore for stabilize the debt the primary surplus must be equal to 210 billion. So, the answer is (A) 210 billion.