Suppose that the federal government had a budget deficit of 80 billion in year 1 and 10 billion in year 2, but it had budget surpluses of 140 billion in year 3 and 20 billion in year 4.
Also assume that the government uses any budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have
A) increased by 250 billion. B) decreased by 70 billion.
C) decreased by 62.5 billion. D) increased by 70 billion.
Question 2
Consider two economies with the same GDP per capita: Barylia and Lithasia. The savings rate in Barylia is 20 while the savings rate in Lithasia is 60.
a. Which of these two countries is likely to accumulate capital faster?
b. The government in Barylia decides to provide incentive to its citizens to increase the savings rate further to 80 as a means to improve standards of living. Will the increase in savings and thus investment and output translate into improvements in the standard of living?
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