Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $4 trillion while raising only $3 trillion worth of taxes.

(a) What will be the government’s deficit?

(b) If the government finances the deficit by issuing bonds, what amount of bonds will it issue?

(c) At a 4 percent rate of interest, how much interest will the government pay each year?

(d) Add the interest payment to the government’s $4 trillion expenditures for the next year, and assume that taxes remain at $3 trillion. In the second year, compute the

(i) Deficit.

(ii) Amount of new debt (bonds) issued.

(iii) Total debt at end of year.

(iv) Debt service requirement.