ECON 1P92 Lecture Notes - Ceteris Paribus, Disposable And Discretionary Income, Consumption Function

50 views9 pages
2 Feb 2013
Department
Course

For unlimited access to Class Notes, a Class+ subscription is required.

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
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 9 pages and 3 million more documents.

Already have an account? Log in
[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
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 9 pages and 3 million more documents.

Already have an account? Log in
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
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 9 pages and 3 million more documents.

Already have an account? Log in

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
1 Booster Class
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
1 Booster Class