ECON 209 Lecture : Chapter 22 Adding Government and Trade to Simple Macro Model.docx

• School: McGill University
• Department: Economics (Arts)
• Course: ECON 209
• Professor: Mayssun El- Attar Vilalta

Document Summary

Chapter 22 adding government and trade to simple. Purchases of goods and services (g) it is adding directly to demand for economy"s current output of goods and services. Transfer payments also affects desired ae but only through the effect these transfers have on household"s income. Only g is part of desired aggregate expenditures, not including transfer payments. Assume g is autonomous with respect to yd. Net taxes (t) are total tax revenue net of transfer payments. We assume net taxes are given by: t = ty: t = net tax rate. As y rises, a tax system with given tax rates will yield more revenue (net of transfers) Assume that tax rate is an autonomous policy variable. With t we represent a complex tax and transfer structure. Budget balance is difference between g and t (g does not include debt-service payments) Government uses excess revenue to buy back outstanding government debt. The government must borrow excess of spending over revenues.