Question

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?

Short answer

Government debt at the end of 25 years will be $95 Billion.

Step-by-step solution

Concept Itroduction.

Spending by Government:

According to economic theory, an economy's government earns money by charging indirect taxes, which then spends for purchases and investments. A balanced budget or deficit occurs when a year's expected income surpasses or falls well short of the year with the anticipated expenses.

Explanation of solution.

It is given that 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.

So after 10 years, the total debt will become,

$10\times 10\mathrm{billion}=100\mathrm{billion}$

A surplus of $1 billion for the next five years than the total surplus will be,

$5\times \$1\mathrm{billion}=\$5\mathrm{billion}$

If the government pays some of the old debt then the surplus remains given below, $\$100\mathrm{Billion}-\$5\mathrm{Billion}=\$95\mathrm{Billion}$

For the next 10 years, the same government runs a balanced budget.

So, therefore the government debt at the end of 25 years will be $\$95\mathrm{Billion}$.