The following question deals with a hypothetical economy, Caledonia, in a certain fiscal year. The Caledonian government's spending excluding public debt charges is $280 billion, and federal tax revenues are $300 billion. a. If the interest rate is 5% and public debt at the start of the year is $700 billion then the government's budget deficit is $ 120 billion. If the interest rate is still 5% but public debt at the start of the year is $800 billion then the budget deficit is $ 20 billion. Therefore budget deficits and the size of the public debt are directly related. b. If the interest rate is 4% and public debt at the start of the year is $700 billion then the government's budget deficit is $ -20 billion. If public debt at the start of the year is still $700 billion but the interest rate is 5% then the budget deficit is $ -20 billion. Therefore budget deficits and the interest rate are directly related