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Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have

Multiple Choice
increased by $90 billion.
increased by $20 billion.
decreased by $70 billion.
decreased by $20 billion.

1 answer

To determine the change in the federal government's public debt over the four years, we can calculate the total budget deficits and surpluses.

  1. Budget Deficits:

    • Year 1: $40 billion
    • Year 2: $50 billion
    • Total Deficits = $40 billion + $50 billion = $90 billion

  2. Budget Surpluses:

    • Year 3: $20 billion
    • Year 4: $50 billion
    • Total Surpluses = $20 billion + $50 billion = $70 billion

Now, we can find the net change in public debt over the four years:

  • Total Debt Increase due to Deficits: $90 billion
  • Total Debt Decrease due to Surpluses: $70 billion

Net Change in Public Debt: \[ \text{Net Change} = \text{Total Deficits} - \text{Total Surpluses} = 90 \text{ billion} - 70 \text{ billion} = 20 \text{ billion} \]

Since the total deficits exceed the total surpluses, the overall public debt has increased.

Final answer: The federal government's public debt would have increased by $20 billion.