Question

You are appointed secretary of the treasury of

recently independent country called Rugaria. The currency of Rugaria is the

lav. The new nation began Öscal operations this year, and the budget situation

is that the government will spend 10 million lavs and taxes will be 9 million lavs.

The 1-million-lav di§erence will be borrowed from the public by selling 10-year

government bonds paying 5 percent interests. The interest on the outstanding

bonds must be added to spending each year, and we assume that additional

taxes are raised to cover that interest. Assuming that the budget stays the same

except for the interest on the debt for 10 years, what will be the accumulated

debt? What will the size of the budget be after 10 years.​

Answer 1

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