The government's future period budget constraint is
A) G' + (1 + r)B = T'.
B) G' + T' = (1 + r)B.
C) G + G' = T - T'.
D) B = G - T.
E) G' = T' + (1 + r)B.

Question

Quizplus · Accepted Answer

The government's future period budget constraint is G' + (1 + r)B = T'. This is because the government must finance its spending (G') either through taxes (T') or by borrowing (B). If the government borrows, it must pay interest on the debt in the future, which is why the budget constraint includes the term (1 + r)B.

The Government's Future Period Budget Constraint Is