Consider an economy that has accumulated a public debt of $1250 billion over the
ID: 1119004 • Letter: C
Question
Consider an economy that has accumulated a public debt of $1250 billion over the period of its history through the end of fiscal year 2004. In fiscal year 2005 government spending outlays were $0.75 trillion, and its tax receipts were $0.5 trillion. In fiscal year 2006, government spending outlays were $1 trillion and its tax receipts were $0.9 trillion. In 2007, government spending outlays were $1.2 trillion, and its tax receipts were $1.25 trillion. In 2008, government spending outlays were $1 trillion and its tax receipts were $1 trillion, and in 2009, government spending outlays were $1.25 trillion and its tax receipts were $1.1 trillion. First, what is the public debt at the end of fiscal year 2008? Second, what is the public debt at the end of fiscal year 2009? Third, what is the budget situation for fiscal year 2006? Fourth, what is the budget situation for fiscal year 2008? Fifth, if this economy is projected to run yearly deficits over the next 10 years that increase by 2% each year starting after fiscal year 2009, what is the public debt going to be at the end of fiscal year 2019. Finally, why is rising public debt bad for an economy, from an economics perspective?
Explanation / Answer
Public debt at the end of 2008 = Public debt until 2004 + public debt in 2005 + public debt in 2006 + PD in 2007 + PD in 2008 = 1250 + (750 - 500) + (1000 - 900) + (1200 - 1250) + (1000 - 1000) = 1250 + 250 + 100 - 50 + 0 = 1550 billion
Public debt at the end of 2009 = public debt at the end of 2008 + public debt in 2009 = 1550 + (1250 - 1100) = 1550+150 = 1700 billion
There was a budget deficit of 100 billion in the year 2006 as the government reciepts were short of govt. expenditures by $100 billion
In the year 2008, the deficit for the govt. in that year is zero since the govt. recieves taxes equal to its expenditure
Public deficit at the end of 2019 starting from 2009 = 1700(1.02)10 = 2072.2905 million
Public debt is bad for the economy since it reduces the government's resources over the years, and if accumulated year after year, the govt. will have to indulge into deficit financing which could have serious consequence on the economy.