Week 9

Question 1

What is the Government budget constraint?

Answer 1

G(t) + Tr(t) + i(t)B(t-1) = T(t) + (B(t) - B(t-1)) + (M(t) - M(t-1))
Where G is govt purchases
t is taxes
B is debt
i is interest rate
M is change in the stock of money

Question 2

What is the government debt in time t?

Answer 2

B(t) = (1+i(t))B(t-1) + G(t) - T(t)

Question 3

What is the primary deficit?

Answer 3

G(t) - T(t)

Question 4

What are the consequence of high inflation and default?

Answer 4

Lenders worry about repayment ability
Investors demand higher interest rates
If lenders stop:
- Govt may print more money to satisfy budget perhaps causing more inflation

Question 5

What is a default?

Answer 5

Govt declares it will not repay certain debts
On it will repay less than face value
When govt borrows:
Beneficiaries of borrowing may not be the same people who repay debt

Question 6

What is generational accounting?

Answer 6

calculates extent to which current policies pass on tax burders to future generations