EC140 Lecture Notes - Lecture 6: Fiscal Policy
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Adding government and trade to the simple model. Government purchases of goods/services (g) are part of desired aggregate expenditure (ignoring transfer payments) Net taxes (t) are total tax revenues net of transfer payments. Given by equaion t = ty: t net tax rate increase in net tax revenue when naional income rises by . Diference between g and t (ignoring debt-service payments: net tax revenue minus government purchases t g. When g < t budget surplus. When g > t budget deicit. When g = t balanced budget. When measuring overall contribuion of government to desired aggregate expenditure, all levels of government must be included: paricularly important in canada, combined purchases of provincial and municipal governments are larger than federal government purchases. Make two central assumpions: canada"s exports are autonomous with respect to canadian gdp, canada"s imports rise as canadian gdp rises. Desired imports im = my: m marginal propensity to import.