Question

Suppose congress cuts taxes and leaves spending levels untouched. this will do what to interest rates and the dollar exchange rate?

Answer 1

Beginning with the fact that all government spending must be paid for by someone—by previous, present, or future generations—generational accounting can begin.

In other words, over an unlimited period of time, taxes must be sufficient to cover all government transfers, debt payments, and purchases of goods and services.That is known as the "inter-temporal budget restriction" by economists.

The concept of "generational balance," or the idea that the net tax rate should be the same for present and future generations, is fundamental to generational accounting.

The advocates of generational accounting draw the conclusion that fiscal policy is out of generational balance if the net tax rate for future generations is higher than the net tax rate for newborns. However, as we will argue shortly, this criterion is absurd.

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