Question

Assume we start with a total government debt of $0. What happens at the end of each year? Hint if I borrow $10 million then my debt is equal to $10 million. In year 1 the government spends $415 million and collects $356 million in taxes, Public saving in year 1 is equal to $ _________ million and the government debt is equal to $ ________ million. In year 2 the government spends $400 million and collects $360 million in taxes. Public saving in year 2 is equal to $ _________ million and the government debt is now equal to ___________ million.

Answer 1

Public saving is government savings when the government runs a budget surplus, it saves the rest of the money. If it spends more than it earns through taxes or other revenues, it borrows money which is government debt.

In the first year, govt spends $415 million and collects $356 million; they have public savings of -$59 million. and government debt = $59 million.

In the second year, govt spends $400 million and collects $360 in taxes; they again spent more than they earned and hence their public savings is -$40 million and government debt is now $59 million + $40 million = $99 million.