Question 1.

A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of $400 million. In year two, the government runs a deficit of $1 billion. In year three, the government runs a surplus of $200 million.

What is the total debt of the government at the end of year three? ___________

Question 2

If a government runs a budget deficit of $10 billion dollars each year for ten years, then a surplus of $1 billion for five years, and then a balanced budget for another ten years, what is the government debt?___________

Question 3

Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and identify the diagram using aggregate demand and aggregate supply curves to illustrate your answer.

Instructions: In the first blank enter in the type of policy (expansionary/contractionary) and in the second blank enter the figure that represents the type of policy (Figure A/Figure B) I have attached this diagram.

a) A recession. ____________ and ___________

b) A stock market collapse that hurts consumer and business confidence. _____________ and ___________

c) Extremely rapid growth of exports. ____________ and _________

d) Rising Inflation. _________ and ____________

e) A rise in oil prices. _____________ and _____________

Question 4

During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Explain how the deficit demand is offset by the use by government in investment using a graph.

A (increase/decrease)________________

in (government/private)________________

investment, reflected in a (rightward/leftward)_______

shift of the demand for capital could be compensated for by an (increase/decrease) _________

in (government/private) _______________

spending, shifting the curve to the (right/left). _____________________

Question 5 (4 points)

Assume that you are employed by the government of Tanzania in 1964, a new nation recently independent from Britain. The Tanzanian parliament has decided that it will spend 10 million shillings on schools, roads, and healthcare for the year. You estimate that the net taxes for the year are eight million shillings. The difference will be financed by selling 10-year government bonds at 12% interest per year. The interest on outstanding bonds must be added to government expenditure each year. Assume that additional taxes are added to finance this increase in government expenditure so the gap between government spending is always two million. If the school, road, and healthcare budget is unchanged, compute the value of the accumulated debt in 10 years.

The accumulated debt after 10 years will be:

___________________million shillings.