In the past 25 years, there have been several attempts by US politicians to codify a requirement for zero government deficits into law. In the mid-1990s, for example, Congress considered a 'balanced budget amendment' to the US Constitution, which came within one vote of passing in the Senate and being sent to the states for ratification. Several US states have added balanced budget provisions to their constitutions. Similar rules limiting the government's ability to run deficits have been adopted in Germany, Hong Kong, Italy, Spain, and Switzerland. 

a) Use your understanding of the short-run, medium-run, and long-run models of the economy to discuss the pros and cons of these constitutional rules. 

b) In light of your answer to (a), would you be more or less likely to enter a market where the government had just adopted such a legal provision? Would your answer depend on whether the economy of that country is currently at an expansionary or contractionary point in the business cycle? What other considerations would affect your answer? Explain.

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a Pros and Cons of Constitutional Rules Limiting Government Deficits ShortRun Model Pros Constitutional rules limiting government deficits can help prevent excessive government borrowing which may lea... View the full answer