Question

18. Suppose that at the end of 2014, the government holds debt of $150 billion, has collected tax revenue of $50 billion, and has spent $75 billion. The national debt at the beginning of 2015 is: A) $25 billion. B) $125 billion. C) $175 billion. D) $275 billion. 19. What approach to federal finance would you agree with if you wanted federal government revenues to equal federal government expenditures every year? A) annually balanced budget B) cyclically balanced budget C) functional finance D) trade-balanced budget 20. The government can finance a budget deficit by: A) buying bonds from the Federal Reserve. B) buying bonds from the public. C) selling assets. D) buying assets. 21. The federal government can finance its debt by all the following measures EXCEPT a(n): A) increase in the money supply. B) increase in the federal funds rate. C) sale of government bonds. D) sale of government assets. 22. When the government's debt is monetized: A) banks buy bonds from the government. B) the government sells some of its assets. C) foreign citizens buy bonds from the government. D) the Federal Reserve buys bonds from the government.

Answer 1

18. The correct answer is 'Option C'.

It is given that the government holds a debt of $150 billion. It spends $75 billion and collects $50 billion as taxes which adds to the deficit of the government of $25 billion ($75 billion - $50 billion). To finance this expenditure, government will again borrow $25 billion. So, the national debt will be $175 billion ($150 billion + $25 billion).