Purchase Solution

Deficits and debt

Not what you're looking for?

Ask Custom Question

Try the following exercises to better understand how the national debt is related to the government's budget deficit.
a. Assume that the gross national debt initially is equal to $3 trillion and the federal government then runs a deficit of $300 billion
i. What is the new level of gross national debt?
ii. If 100 percent of the deficit is financed by the sale of securities to federal agencies, what happens to the amount of debt held by the public? What happens to the level of gross debt?
iii. If GDP increased by 5 percent in the same year that the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?

b. Now suppose that the gross national debt initially is equal to $2.5 trillion and the federal government then runs a deficit of $100 billion.
i. What is the new level of gross national debt?
ii. If 100 percent of the deficit is financed by the sale of securities to public, what happens to the amount of debt held by the public? What happens to the level of gross debt?
iii. If GDP increased by 6 percent in the same year that the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?

Purchase this Solution
Solution Summary

The Solution discusses debt and deficits for a government.

Solution Preview

Whenever the federal government requires funds which it does not have, it borrows such funds by selling securities either to federal agencies or the public or both. Such borrowing creates a deficit which when added to the previous level of debt increases the size of the debt. If the borrowing is done solely through the sale of securities to the agencies, the amount of debt held by the public does not change. The ratio of debt divided by GDP can change if ...

Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

View More Free Quizzes
Related BrainMass Solutions

  • Financing of government budget deficits by foreign sources

    If however foreign borrowing is used for current consumption future generations will be worse off as they must repay the debt. They will have to divert some of their income to pay back the foreign debt and this would make them worse off.

  • Federal Budget Deficit

    Taking business personally: Identify some policy change that you propose or oppose to reduce the federal government budget deficits and debt. Evaluate your position using the budget deficits and debt principle.

  • Deficits and Surpluses

    Economics: Principles, Problems, and Policies. McGraw Hill Publishers. Politics, Surpluses, Deficits, and Debt (2008).

  • Help with Multiple choice questions

    Economists generally are: A) more concerned about structural deficits than passive deficits. B) equally concerned about structural and passive deficits. C) more concerned about passive deficits than structural deficits.

  • Federal Debt

    422523 Federal Debt Explain the relationship between federal debt and annual yearly surpluses or deficits.

  • reducing the federal government budget deficit

    100621 What would be the correct policy change to reduce the federal government budget deficits What would be the correct policy change to reduce the federal government budget deficits and debt?

  • Large federal budget deficits

    increase consumption and saving.

  • Debt and long-term economic growth

    Fiscal and monetary policies and budget deficits; Debt and long-term economic growth

  • Trade Deficit Causes, Benefits and Costs

    The benefits to our trade deficit are the large amount of low priced goods that are available in the U.S. and the low chance that China will call in our debt or stop lending to the U.S. because of their need to sale their goods in the U.S.

  • Congressional Budget Office

    As a result, money borrowed to pay these deficits will steadily increase the National Debt. This solution is comprised of a detailed explanation to answer the request of the assignment of more than 100 words of text.

View More Related Solutions