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CHAPTER 22.docx

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McGill University
Economics (Arts)
ECON 209
Paul Dickinson

CHAPTER 22 ADDING GOVERNMENT AND TRADE TO THE SIMPLE MACRO MODEL221 INTRODUCING GOVERNMENT Fiscal policy the use of the governments tax and spending policies to achieve government objectivesGovernment purchases Two typesPurchases of goods and servicesadds directly to demands for economys current outputrepresented by GTransfer paymentsplace no direct demand on production merely transfer funds from taxpayers to the recipients Assume level of government purchases G is autonomous with respect to level of national incomeDoes not automatically change just because GDP changesNet tax revenues Net taxestotal tax revenue minus transfer payments denoted T Net tax revenues are always positiveWe assume that net tax revenues vary directly with the level of national income but that the tax rate is autonomousEx when income rises People will pay more income tax in total and government will reduce its transfers to households TtY Where t is the net tax ratethe increase in net tax revenue generated when national income rises by one dollar Also called the marginal propensity to tax The Budget Balance Difference between total government revenue and total government expenditureTG Budget surplusany excess of current revenue over current expenditure Budget deficitany shortfall of current revenue below current expenditure Provincial and municipal governments In Canadaprovincialmunicipal governments account for more purchases of goods and services than federal government About same amount of tax revenueWhen measuring the overall contribution of government to desired aggregate expenditure all levels of government must be included Summary 1 All levels of government add to desired aggregate expenditure through their purchases of goods and services G G will be one of the autonomous variables of the AE function 2 Governments also collect tax revenue and make transfer payments Net tax revenues are denoted T not directly in AE function YYT desired consumption depends on Y DD
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