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Explaining the National Debt and Budget Deficits

A) Assume that the gross national debt initially is equal to $3 trillion and the federal goverment then runs a deficit of $300 billion.
1) What is the new level of gross national debt?
2) If 100% of the deficit is financed by the sale of securities to federal agencies, what happens to the amount of debt held by the public? What happens to the level of gross debt?
3) If GDP increased by 5 percent in the same year that the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?

B) Now suppose that the gross national debt initially is equal to $2.5 trillion and the federal goverment then runs a deficit of $100 billion.
1) What is the new level of gross national debt?
2) If 100% of this deficit is financed by the sale of securities to the public, what happens to the level of debt held by the public? What happens to the level of gross debt?
3) If GDP increases by 6% in the same year as the deficit is run, what happens to gross debt as a percentage of GDP? What happens to the level of debt held by the public as a percentage of GDP?

Solution Preview

A)
1) New gross debt = old gross debt + new deficit = $3 trillion + $0.3 trillion = $3.3 trillion.
2) The debt held by the public does not change. The gross debt increases by $300 billion.
3) The percentage of GDP represented by ...

Solution Summary

Calculations showing how federal budget deficits affect the level of the national debt.

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