The government's present value budget constraint states that
A) taxes must equal government spending in each period.
B) the present value of government spending must be equal to the present value of consumers' disposable incomes.
C) the present value of government spending must be equal to the present value of taxes.
D) the government may run deficits each and every year, as long as the deficits are sufficiently small.
E) governments can increase spending as long as deficits are financed by issuing debt.

Question

Quizplus · Accepted Answer

The present value budget constraint states that the present value of government spending must be equal to the present value of taxes. This means that the government cannot finance its spending by running persistent deficits or by issuing debt, as both options would violate the constraint. Instead, the government must ensure that its spending is matched by an equivalent amount of tax revenue, either in the present or in the future.

The Government's Present Value Budget Constraint States That