Question

Explain how each of the following will affect the net public debt, other things being equal. a. Previously, the government operated with a balanced budget, but recently there has been a sudden increase in federal tax collections b. The government had been operating with a very small annual budget deficit until three hurricanes hit the Atlantic Coast, and now government spending has risen substantially. c. The Government National Mortgage Association, a federal government agency that purchases certain types of home mortgages, buys U.S. Treasury bonds from another government agency.

Answer 1

a) Increase in the tax collection will increase the budget surplus in the market and the government will see a much reduced public debt because they will now have a surplus budgets.

b) This will increase the public debt because public debts are nothing but accumulated budget deficits, increased government expenditure will increase the budget deficit and that will increase the debt.

c) This will not affect the debt because here the debt has only been transfered from one government agency to the other.