In year one, suppose the federal government has no national debt and spends $100 billion, while raising only $50 billion in taxes. The U.S. Treasury will issue $ billion of government bonds to finance the deficit.
b. In year two, assume tax revenues and government expenditures remain the same. If the government makes a payment on debt service at 10 percent rate of interest , this will yield a total government expenditure in the second year of $ billion.
c. Therefore in year two, the deficit will be equal to $ billion, the amount of new debt issued will be $ billion and the new national debt (year one + year two) will equal $ billion.