Question

Assume we start with a total government debt of $0. What happens at the end of each year? Hint if I borrow $10 million then my debt is equal to $10 million.

In year 1 the government spends $405 million and collects $356 million in taxes. Public saving in year 1 is equal to $__million and the government debt is equal to $ __ million.

In year 2 the government spends $390 million and collects $360 million in taxes. Public saving in year 2 is equal to $ __million and the government debt is now equal to $ __million.

In year 3 the government spends $360 million and collects $358 million in taxes. Public saving in year 3 is equal to $ __ million and the government debt is now equal to $ __ million.

In year 4 the government spends $405 million and collects $425 million in taxes. Public saving in year 4 is equal to $__ million and the government debt is now equal to $ __million.

Answer 1

Year 1.

Public saving = Tax revenue - Government spending

Public saving = $356 million - $405 million

Public saving = -$49 million.

Hence there is deficit of $49 million.

The government debt = Sum of deficit - Sum of surplus

The government debt = $49 million.

In year 1 the government spends $405 million and collects $356 million in taxes. Public saving in year 1 is equal to -$49 million and the government debt is equal to $49 million.

Year 2.

Public saving = Tax revenue - Government spending

Public saving = $360 million - $390 million

Public saving = -$30 million.

Hence there is deficit of $30 million.

The government debt = Sum of deficit - Sum of surplus

The government debt = $49 million + $30 million = $79 million

In year 2 the government spends $390 million and collects $360 million in taxes. Public saving in year 2 is equal to -$30 million and the government debt is equal to $79 million.

Year 3

Public saving = Tax revenue - Government spending

Public saving = $358 million - $360 million

Public saving = -$2 million.

Hence there is a deficit of $2 million.

The government debt = Sum of deficit - Sum of surplus

The government debt = $49 million + $30 million + $2 million = $81 million

In year 3 the government spends $360 million and collects $358 million in taxes. Public saving in year 3 is equal to -$2 million and the government debt is equal to $81 million.

Year 4

Public saving = Tax revenue - Government spending

Public saving = $425 million - $405 million

Public saving = $20 million.

Hence there is a surplus of $20 million.

The government debt = Sum of deficit - Sum of surplus

The government debt = $49 million + $30 million + $2 million - $20 million = $61 million

In year 4 the government spends $405 million and collects $425 million in taxes. Public saving in year 4 is equal to $20 million and the government debt is equal to $61 million.