Question

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

Short answer

At the end of the 25 years, the government debt will be 95 billion dollars.

Step-by-step solution

Period 1: Budget Deficit of 10 billion dollars for 10 years.

In this period, the government has a budget deficit of 10 billion dollars each year. So for 10 years, we will multiply the annual deficit by the number of years: \( 10 \times 10 = 100 \) billion dollars deficit in this period.

Period 2: Surplus of 1 billion dollars for 5 years

In this period, the government has a budget surplus of 1 billion dollars each year. In this case, we will usually subtract the surplus from the debt. To find out the total surplus for 5 years, we will multiply the annual surplus by the number of years: \( 1 \times 5 = 5 \) billion dollars surplus in this period.

Period 3: Balanced budget for 10 years

In this period, the government has a balanced budget, which means there is no deficit or surplus. Therefore, the debt does not increase or decrease in this period. The government debt remains the same.

Calculate the total government debt

To find out the total government debt, we need to add the debt from Period 1 and subtract the surplus from Period 2. Here's the calculation: Total Government Debt = Debt from Period 1 - Surplus from Period 2 Total Government Debt = \( 100 \, billion - 5 \, billion \) Total Government Debt = \( 95 \, billion \) dollars So, at the end of these 25 years, the government debt will be 95 billion dollars.

Key concepts

Budget Deficit

Understanding a budget deficit is crucial when examining government finances. A budget deficit occurs when a government spends more money than it receives in revenue.

It's like when you spend more money than you earn; you have to borrow to cover the gap. Similarly, a government borrows money to cover its deficit, which adds to the national debt. For instance, if a government runs a budget deficit of 10 billion dollars every year for a decade, it means it has been overspending by this amount annually, and the total debt increases by 100 billion dollars over ten years.

Budget Surplus

A budget surplus is the opposite of a deficit. This occurs when a government's revenue exceeds its spending.

Think of it like earning more than what you spend and saving the extra. When a government has a surplus, it often uses the extra funds to pay down its debt. For a government that runs a surplus of 1 billion dollars per year for five years, it will have a surplus totaling 5 billion dollars that can be used to reduce its debt.

Balanced Budget

Maintaining a balanced budget means that a government's spending is equal to its income. No borrowing is necessary because it doesn't spend more or less than it earns.

Achieving a balanced budget can be challenging and requires careful fiscal management. If a government has a balanced budget for ten years after a period of deficit or surplus, it indicates financial stability because it is living within its means, and the national debt does not grow during this time.

Fiscal Policy

Fiscal policy refers to how a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It plays a significant role in managing economic growth.

Fiscal policy is used to control inflation, reduce unemployment, and influence the overall pace of economic activity. By adjusting its spending and revenue collection, a government can either incur a deficit, achieve a surplus, or maintain a balanced budget. The policy decisions on taxes and spending impact government debt levels and economic performance.