Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $5 trillion while raising only $4.5 trillion worth of taxes. Instructions:
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 $5 trillion expenditures for the next year, and assume that tax revenues remain at $4.5 trillion. In the second year, compute the
(i) Deficit: $billion.
(ii) Amount of new debt (bonds) issued to finance the deficit in the second year: $billion.
(iii) Total debt at the end of the second year: $___billion.
(iv) Debt service requirement: $billion

a. The government's deficit is $0.5 trillion or $500 billion.

b. The amount of bonds issued = $0.5 trillion or $500 billion.

c. At a 4 percent rate of interest, the interest the government will pay each year = $20 billion.

d. i) Deficit: $__520__billion.

(ii) Amount of new debt (bonds) issued to finance the deficit in the second year: $_520___billion.

(iii) Total debt at the end of the second year: $_1,020__billion.

(iv) Debt service requirement: $__40.8__billion

Explanation:

a) Data and Calculations:

Government spending = $5 trillion

Income from taxes = $4.5 trillion

Deficit = $0.5 trillion

Bonds issued = $0.5 trillion

Interest rate = 4%

Annual interest expense = $20 billion ($0.5 trillion * 4%)

Expenditure next year = $5 trillion

Interest payment =          $0.02 trillion

Total governmental spending = $5.02 trillion

Tax revenue =                               4.50 trillion

Deficit =                                        $0.52 trillion

d, conspicuous consumption is when you try to increase your wealth or social status (and in the case he's trying to create the perception of wealth considering he can't really afford it)

forbearance of student loan payments. under forbearance, your loan payments are postponed (or reduced) but interest continues to accrue during the period of forbearance. if you don't pay the interest during that period, the interest may be “capitalized,” which means it is added to your principal balance.