If the government runs a primary deficit in year zero of B0, and, in year 1,...

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If the government runs a primary deficit in year zero of B0, and, in year 1,...

If the government runs a primary deficit in year zero of B0, and, in year 1, it decides to stabilize the debt (i.e., prevent the deficit from rising any further), then in year 1 and beyond, it must run a primary surplus equal to

A. zero.

B. B0.

C. (1+r )B0.

D. r .

E. none of above.

business economics

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Answer 1

Answer #1

Deficit this year = B0

There is deficit because government have borrowed money from some external sources at interest rate r.

It does not matter it is borrowed on simple or compound interest, the final payment after one year would be same on both cases.

To repay the money borrowed, they have to be in surplus of amount (1 + r) * B0 to cover the deficit.

Thus option C is correct.

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Answer 2

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