Suppose the government of Freedonia spends money on only defense, and gets revenue through income taxes. In 1933, the government spent $150 Million on defense and collected $110 Million worth of income taxes. The annual interest rate is 5%. In 1933, Freedonia has total debt of $20 Million.

The country's policy advisors - Groucho, Harpo, Chico, and Zeppo - suggest that the government budget deficit of Freedonia is too big. So the government suggests the following policy: Freeze spending on defense over the next four years, and increase taxes by $15 Million each year for the next four years (so taxes will be $125 in 1934, $140 in 1935, etc).

(a) What is the government's primary budget deficit or surplus in 1933 What is its proposed deficit or surplus in each of the years 1934-1937?

(b) What is the present value of revenues from 1933-1937 in 1933 dollars? What is the present value of expenses from 1933-1937 in 1933 dollars?

(c) Under its current policy, what with Freedonia's debt be at the end of 1937 in 1937 dollars?

Answer rating: 100% (QA)

Answer Freedonias Budget Analysis Continued b Present Value of Revenues and Expenses 1933 Dollars Co... View the full answer