Class Notes (836,580)
Canada (509,856)
Brock University (12,092)
Economics (200)
ECON 1P92 (65)
Lecture

Chapter 22.docx

9 Pages
119 Views
Unlock Document

Department
Economics
Course
ECON 1P92
Professor
Marilyn Cottrell
Semester
Winter

Description
Chapter 22: Introducing Government  Government is and important variable in the economy> Fiscal Policy:  Government expenditures or purchases  Taxation Government Spending  G is part of desired AE Transfer payments: e.g. pensions  not government purchases  only a flow of funds from government to household  affects disposable income and household spending Tax Revenues  Net taxes, T:  Total revenue minus total transfer payments Tax rates are autonomous policy variables, but revenues vary with GDP: T = t Y Where t = marginal propensity to tax. Note: t includes all taxes, So when Y rises by $1, tax revenues rise by t x $1. The Budget Balance: [ T – G ]  G is autonomous  Tax rates are induced  [ T - G ] revenue minus expenditures  If T > G – budget surplus  If T < G – budget deficit As Y increases, T rises  Tax revenue rise  Transfer payments fall Provincial and Municipal Governments  G includes all levels of government in desired AE in public saving  [In Canada – combined purchases of provincial and municipal governments is larger than federal government ] Net Export Function Exports: X  Autonomous with respect to Canadian national income. Imports: IM = mY  Rises as national income increases  Not autonomous  Induced or depends on GDP Marginal propensity to import:  Change in imports caused by a $1 change in GDP  Change in m / Change in y  MPM = m = 20/100 = 0.2 Net export function: NX = X – IM  Falls as national income rises  X constant  IM increase as GDP [ Y ] increase If X > IM:  Foreigners buy more C$  To buy exports  Canada accumulates more foreign currency  Uses foreign currency to buy foreign income-earning assets  Similar to investment ( I )  Produced future income for Canadians If IM > X:  Canadians sell more C$  Buy more imports than foreigners  Canada’s trading partners accumulate C$  C$ used to buy Canadian assets  Liability for Canada  Income will flow to foreigners NX function holds constant:  Foreign national income  Domestic and foreign prices  Exchange rate If any of these change, NX changes Shifts in the Net Export Function Foreign income: If foreign incomes increase  Ceteris paribus, Canadian exports [ X ] increase  Shifts up NX function Domestic and foreign prices: A rise in Canadian prices relative to foreign prices:  Foreign remains constant Canadian is increasing  Reduces Canadian exports  X function shifts down  Imports increase – cheaper  IM function rotates upward  NX function shifts down and gets steeper Exchange rates cause relative prices to change. Appreciation of Canadian dollar:  Increases Canadian prices relative to foreign prices Depreciation of Canadian dollar: Decreases Canadian prices relative to foreign prices Equilibrium GDP  Where desired aggregate expenditure ( AE ) equals national income ( Y )  AE =Y Include:  Government ( T-G )  Net exports ( NX = X – IM ) Adjust consumption:  With government national income ( Y ) is not the same as disposable income ( Yd ) * Yd = Y – T * With taxes:  Disposable income ( Yd ) < national income ( Y )  Suppose T = 0.1Y. (Taxes=10% of Y)  Then, Yd = Y – 0.1Y = 0.9Y (Disposable income = 90% of Y)  Consumption function (out of Yd) C = 10 + 0.8 Yd C = 10 + (0.8)(0.9Y) C = 10+ 0.72 Y With income taxes:  MPC out of national income (0.72)  Is less than the MPC out of disposable income (0.8)  MPC
More Less

Related notes for ECON 1P92

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit