The government budget constraint is:

Question

Quizplus · Accepted Answer

The government budget constraint states that government purchases plus transfer payments must equal taxes plus revenue from money growth. This means that the government's spending (purchases and transfers) must be financed either by taxes, or by creating money. In other words, the government cannot spend more than it is bringing in through taxes and money creation. Choice A is incorrect because revenue from money growth is not always equal to zero, as the government has the ability to create money. Choice C is incorrect because transfer payments are a form of government spending, and are thus included in the overall spending figure. Choice D is incorrect because multiplying spending and revenue figures does not accurately reflect the relationship between government spending and revenue.

The Government Budget Constraint Is