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Chapter 22 Adding Government and Trade to Simple Macro Model.docx

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McGill University
Economics (Arts)
ECON 209
Mayssun El- Attar Vilalta

Chapter 22 Adding Government and Trade to Simple Macro Model 221 Introducing Government Government PurchasesPurchases of goods and services Git is adding directly to demand for economys current output of goods and servicesTransfer paymentsalso affects desired AE but only through the effect these transfers have on households incomeOnly G is part of desired aggregate expenditures not including transfer paymentsAssume G is autonomous with respect to Y DNet Tax RevenueNet Taxes T are total tax revenue net of transfer paymentsWe assume net taxes are given by TtY o Tnet tax rateAs Y rises a tax system with given tax rates will yield more revenuenet of transfersAssume that tax rate is an autonomous policy variableWith t we represent a complex tax and transfer structure Budget BalanceBudget balance is difference between G and T G does not include debtservice payments o If GT a budget surplusGovernment uses excess revenue to buy back outstanding government debt o If GT a budget deficitThe government must borrow excess of spending over revenues It does this by issuing additional government debt bonds or treasury bills SummaryAll levels of government add directly to desired AE through their purchases of goods and services GG will be treated as an autonomous expenditure in our modelNet tax revenues T is positively related to Y D T will enter AE function indirectly through its effect on disposable income Y Recall YYT DD222 Introducing Foreign Trade Net Exports
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