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Economics for Management Studies
Iris Au

Chapter 22 Adding Government and Trade to the Simple Macro Model Notes 22.1 Introducing Government N fiscal policythe use of the governments tax and spending policies Government Purchases N desired government purchases, G, are part of aggregate desired expenditure N government transfer payments do affect aggregate expenditure but only through effect these transfers have on households disposable income N as GDP rises or falls, level of governments transfer payments will generally change, but it is not to be assumed that G does not automatically change just because GDP changes Net Tax Revenues N net taxestotal tax revenue minus transfer payments, denoted T N because transfer payments are smaller than total tax revenues, net tax revenues are positive N disposable income is therefore substantially less than national income N net tax rateincrease in net tax revenue generated when national income rises by $1; also called the marginal propensity to tax N T = tY, where t is the net tax rate The Budget Balance N budget balance is difference between total government revenue and total government expenditure; equivalently, it equals net tax revenue minus government purchases, T G N budget surplusany excess of current revenue over current expenditure N budget deficitany shortfall of current revenue below current expenditure N private savingsaving on the part of householdsthe part of disposable income that is not spent on current consumption N public savingsaving on the part of governments, equal to the government budget surplus N when government has budget surplus, public saving is positive; when government has budget deficit, public saving is negative Provincial and Municipal Governments N federal government raises about same amount of tax revenue as do the provincial and municipal governments combined, but transfers a considerable amount of its revenue to the provinces N when measuring overall contribution of government to desired aggregate expenditure, all levels of government must be included Summary 1. All levels of government add directly to desired aggregate expenditure through their purchases of goods and services, G. 2. Governments also collect tax revenue and make transfer payments. Net tax revenues are denoted T and are positively related to national income. Since T does not rep
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