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Economics Chapter 22 Summary.docx

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Economics (Arts)
ECON 209
Mayssun El- Attar Vilalta

Economics Chapter 22 Summary 22.1 Introducing Government - Gov’t fiscal policy (use of gov’ts tax and spending policies to achieve gov’t objectives) Gov’t Purchases - Gov’t purchase: something adding directly to demands for economy’s current output of goods and services (office supplies, hiring a bureaucrat) - Transfer payments: indirectly affects economy (for ex: welfare or employment insurance)-transfer payments from taxpayers to recipients - Transfer payments aren’t included in AE until the recipient spends the money on something, their consumption is part of AE; only impact is through the recipients disposable income Net Tax Revenues - Taxes reduce household disposable income; transfer payments raise disposable income (all relative to national income) - Net taxes- total tax revenue minus transfer payments denoted T - Net tax revenue is positive b/c transfer payments are smaller than total tax revenues - Therefore disposable income is substantially less than national income - Tax revenues: T= t Y (t is net tax rate or marginal propensity to tax) - Net tax rate: increase in net tax revenue generated when national income rises by one dollar The Budget Balance - Budget balance: difference between total gov’t revenue and total gov’t expenditure (T-G) - When net tax revenue exceed purchases= budget surplus - When purchase exceeds tax= budget deficit - When tax = purchases: balanced budget - When in deficit: must borrow excess of spending by issuing gov’t debt (bonds or treasury bills) and uses its later surplus to pay back outstanding got debt Provincial and Municipal Gov’t - Provincial and municipal gov’ts purchase more than federal gov’t - When measuring overall contribution of gov’t to AE, all levels of gov’t must be included 22.2 Introducing Foreign Trade Net Exports - Exports are autonomous from Canadian national income but it falls as national income rises - Imports depend on Canadian income therefore as consumption rises, as does imports - IM= m Y where m is the marginal propensity to import - Marginal propensity to import (MPI) - increase in import expenditures induced by $1 increase in national income. Denoted by m - Net exports (NX)= X- m Y (exports minus imports) - Since exports are autonomous to Y but imports are positively related to Y, we see net exports are negatively related to national income; slope is the negative of MPI Shifts in the Net Export Function - Anything affecting Canadian exports shifts net export curve parallel to itself; upwards w/ increase, downward with decrease - Anything affecting proportion of income consumers want to spend on imports changes the slope of the net export function Changes in Foreign Income - Increase in foreign incomes leads to increase in quantity of Canadian goods demanded by foreign countries: increase Canadian exports (x shifts up so does the NX function) - Decrease in foreign income leads to reduction in Canadian exports and parallel shift down in NX function Changes in International Relative Prices - Change in Canadian goods relative to foreign goods cause both imports and exports to change - Increase in Canadian prices means foreigners see Canadian goods as more expensive than their own goods and goods imported from elsewhere so value of Canadian exports falls so X curve shifts down; Canadians will also see imports from foreign countries as cheaper shifting money associated w/ imports upwards leading to a downward shift and steepening of NX - Fall in Canadian prices shifts curve up and flattens it - Depreciation of Canadian dollar = foreigners pay less of their money for one of ours - Therefore they will buy more of our stuff 22.3 Equilibrium National Income Desired Consumption and National Income - When net taxes are positive, disposable income is less than national income - If tax rate is 10 percent; Y D Y-T = 0.9Y; thus you substitute it into the formula where there was just Y D - Before when disposable income= national income MPC was the MPC out of disposable income, now it’s MPC out of national income which is
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