Q. Assume that maximum income that can be collected from all taxes, including seignior age, is 970,000 goods and that maximum real government debt that 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. Assume no debt was issued in previous period (B0 = 0). Current leaders of nation detest government expenditures however know they will not be in power next period. How can these leaders use their control over current taxes, subsidies and government debt to force their successors to reduce steady -state government expenditures below 900,000 goods? Use government budget constraint in giving your answer.

Government Budget constraint is:

g + (r/n)b0 = τ1 + q1(1 -1/z1) + bt where o,1,and t are subscripts