Answer to Question #262031 in Macroeconomics for manuewrz

Question

1. Write an expression that illustrates the government's intertemporal budget constraint

2. What are the two important indicators in describing the sustainability of the government's fiscal position ?

3. Derive an expression that illustrates a sustainable time path for government's fiscal policy

4. State four (4) problems associated with the measurement of fiscal deficit

Answer 1

1)     This is the constraint on the flows of spending and income, as well as the stock of wealth, in a dynamic economy spanning two or more periods. In an economy with perfect credit markets, for example, a consumer's intertemporal budget constraint requires that the present value of their lifetime consumption does not exceed the present value of their lifetime income + their initial wealth. Because of the government's intertemporal budget constraint, the present value of current and future taxes must be adequate to pay current and future government spending, as well as the original stock of government debt. The intertemporal budget constraint reflects the reality that current expenditure is not constrained by present wealth when borrowing and lending.

2)     Ability to develop sufficient future resources and willingness to do so. Ability and willingness to maintain or improve public service delivery. Willingness and ability to fulfill financial obligations and commitments. Intergenerational equity is achieved. The extent of long-term fiscal imbalances can be used to determine whether fiscal policy is sustainable. Unfortunately, the yearly official deficit—the gap between annual expenditures (government purchases and transfer payments) and tax and nontax receipts—is the main indicator of a country's fiscal imbalance.

3)     A sustainable fiscal policy is one in which the public debt-to-GDP ratio (debt-to-GDP ratio) is steady or reducing over time. GDP is a metric for determining the size of a country's economy based on the total value of all final goods and services produced in a given year.

4)     The government's fiscal deficit measures are hampered by four issues. To begin with, the measurement does not account for inflation, making it more incorrect. Second, the measurement overlooks the influence of fluctuations in the business cycle, which pose a significant threat. Third, the calculation excludes a number of liabilities, such as Medicaid, Medicare, and Social Security, which account for a major portion of the country's public debt. Finally, the measurement does not account for changes in government liabilities, resulting in a variance in government assets.