Final answer:
Fiscal capacity refers to the government's ability to generate revenue, incur debt, and meet financial obligations. It is distinct from the national debt or financial position and is crucial for maintaining long-term fiscal health and avoiding negative economic consequences like trade imbalances and financial crises.
Step-by-step explanation:
The term that describes a government's ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they become due is known as B. Fiscal capacity. Fiscal capacity is crucial because it represents the ability of a government to sustain its financial health over the long term, especially when considering the demands and responsibilities that require funding. Governments must exercise fiscal responsibility to ensure they do not spend excessively beyond their revenue collections, leading to budget deficits and borrowing, which, if not managed well, can reduce financial capital for private sector firms, lead to trade imbalances, and even trigger financial crises.
Fiscal capacity is different from the national debt, which is the total amount owed by the government, or the financial position, which refers to the government's assets and liabilities at a specific point in time. Budget deficits occur when a government's expenditures exceed its revenues in a given year, and prolonged and large deficits can have negative impacts on the economy by increasing the interest rates and reducing the amount of capital available for private investments as shown in the increase of equilibrium interest rates from 6% to 7% in Figure 30.14.