Q. Government budget constraint

(a) Write the government's ‘lifetime' budget constraint assuming its lifetime is just three periods (0, 1 and 2), and assuming that it be solvent.

(b) Briefly discuss the implications for the government's lifetime budget constraint of the perception that the government will last for a very long time.

(c) Suppose the federal government offers you a rebate on your current taxes (T0 falls), without promising to alter its spending path (G0 and G1 stay the same). What happens to your lifetime tax liability? Would you tend to spend or save your tax rebate? Why?

(d) How can you think about the Greek debt crisis in terms of that government's lifetime budget constraint?

A (simple) economy produces the following output during the year: 50 bottles of wine, 100 haircuts, 75 shirts, and 60 bales of cotton. The market price of wine is $20 per bottle, the market price of a haircut is $10, a shirt costs $15, and a bale of cotton costs $5. Three of the haircuts were 'produced' at home without charge, only 40 bottles of wine had been sold by the end of the year (30 were sold to consumers in the economy, while 10 were exported); the rest were held in inventory, and 50 bales of cotton were used to produce the shirts. Compute this economy's GDP for the year. Is the circular flow model best thought of as a set of budget identities (or constraints), or a basic theory of underlying macroeconomic behavior and therefore useful for making policy predictions? Briefly explain.