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Chapter 14: Problem 12

If the government budget deficit equals \(\$ 240\) billion and the money supply increases by \(\$ 100\) billion, how much must the government borrow?

Short Answer

Expert verified
Answer: The government must borrow $140 billion.

Step by step solution

01

Identify the given values

The exercise provides us the values of the government budget deficit, which is \(\$240\) billion, and the increase in the money supply, which is \(\$100\) billion.
02

Understanding the concept of government borrowing

When a government needs to cover its budget deficit, it will usually borrow the required amount from the financial markets. In this case, the government budget deficit is \(\$240\) billion. This means that the government needs to find \(\$240\) billion to cover its expenses that exceed its income.
03

Knowing the sources of funding

The exercise specifies that the money supply has increased by \(\$100\) billion. This implies that part of the deficit will be covered by this new influx of money.
04

Calculate the amount of government borrowing

To determine the amount the government must borrow, we can subtract the increase in the money supply from the budget deficit, as the budget deficit is the amount of money the government needs to finance above its income. Therefore, the amount the government must borrow is: \(\$240{\text{ billion}} - \$100{\text{ billion}} = \$140{\text{ billion}}\)
05

State the answer

In conclusion, the government must borrow \(\$140\) billion to finance its budget deficit considering the increase in the money supply.

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