Suppose the government of Congo spends money on only education, and gets revenue through property taxes. In 2015, the government spent $120 on education and collected $100 in property taxes. The annual interest rate is 10%. Congo currently has total debt of $10.
Policy-makers suggest that the government budget deficit of Congo is too big, so the government suggests the following policy: Freeze spending on education over the next four years, and increase taxes by $10 each year for the next four years (so taxes will be $110 in 2016, $120 in 2017, etc).
(a) What is the government's budget deficit or surplus in 2015? What is its proposed deficit or surplus in each of the years 2016-2019? (Don't do any discounting for this question).
(b) What is the present value of revenues from 2015-2019 in 2015 dollars? What is the present value of expenses from 2015-2019 in 2015 dollars?
(c) Under its current policy, what with Congo's debt be at the end of 2019?