Consider this model of government fiscal policy:

where G is government spending, H is taxes, Z is the government deficit, Y is national income, and t is time (t = 0 in the current year). All the variables G, H, Z, and Y are in real terms; G₀, Y₀, α, β, and θ are constant parameters.

a. Interpret the parameter G₀.

b. Interpret the parameter α.

c. Find the equation for determining Z/Y, the ratio of the deficit to national income.

d. If Z is currently positive, determine the conditions under which Z/Y falls over time.

e. State the conclusion in question d in plain English, using no mathematical symbols.

Transcribed Image Text:

G = Goe H = OY Z=G-H Y = Yoet