Question

Over the past year, Ionia's money supply increased by $6 billion, $4 billion in bonds were sold to the public, an unused military base was sold for $3 billion, and the government spent $20 billion.

Ionia had a budget
- surplus.
- deficit.

Determine the amount of Ionia's budget deficit or surplus. (in billions of dollars)
Determine the amount of Ionia's tax revenue for the year. (in billions of dollars)

Answer 1

deficit
$13 billion
$7 billion

Step-by-step explanation:

Much like a cash‑strapped individual may run up a credit card bill or sell a TV set, governments must borrow or sell assets to cover a budget deficit. The government budget constraint summarizes these options.

− = ΔM + ΔB + ΔA

In the equation, is government spending, is tax revenue, ΔM is changes in the money supply, ΔB is bonds sold to the public, and ΔA is assets sold. If government bonds are sold to another government agency, the money supply increases by that amount. If is greater than , there is a budget deficit and the budget constraint will be a positive number.

As the numbers show, Ionia has a deficit of $13 billion.

− = ΔM + ΔB + ΔA
= $6 billion + $4 billion + $3 billion
= $13 billion

Use this deficit and Ionia's government spending of $20 billion to determine tax revenue.

− = $13 billion

= − $13 billion
= $20 billion − $13 billion
= $7 billion