Suppose the federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had budget deﬁcits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its
Budget surpluses to pay down prior years of the public debt. At the end of these four years, the federal
Government's public debt would have
A) increased by $50 billion.
B) increased by $150 billion.
C) decreased by $200 billion.
D) decreased by $150 billion.

Question

Quizplus · Accepted Answer

The federal government had budget surpluses of $80 billion + $120 billion = $200 billion in total in the first two years. It used this surplus to pay down prior years of the public debt, so the public debt decreased by $200 billion. In the next two years, the federal government had budget deficits of $10 billion + $40 billion = $50 billion in total. However, this does not change the fact that the public debt decreased by $200 billion. Therefore, the public debt at the end of four years would be lower than at the beginning by $200 billion, resulting in a decrease of $150 billion overall.

Suppose the Federal Government Had Budget Surpluses of $80 Billion