Assume that the maximum revenue that can be collected from all taxes, including seigniorage,is 970,000 goods and that the maximum real government debt that the population can willingly hold is 950,000 goods. Government debt pays a gross real rate of return of 1.2. In period 1,Government expenditures are equal to 900,000 goods. Suppose no debt was issued in the previous period (B0 = 0). The current leaders of the country detest government expeditures but know
they will not be in power next period. How can these leaders use their control over current taxes,subsidies, and the government debt to force their successors to reduce steady -state government expenditures below 900,000 goods. Use the government budget constraint in giving your answer.
Government Budget constraint is:
g + (r/n)b0 = τ1 + q1(1 -1/z1) + bt where the o,1,and t are subscripts