An economy has $20 billion in debt at the beginning of the year. Tax revenues, net of transfers, are $5 billion while government spending is $15 billion. At the end of the year, the debt is eliminated.

Question

Quizplus · Accepted Answer

The debt would not be eliminated because the government ran a deficit of $10 billion ($15 billion in spending minus $5 billion in tax revenues), which would be added to the existing debt, increasing it rather than eliminating it.

An Economy Has $20 Billion in Debt at the Beginning