MGEA06H3 Lecture 4: Lecture notes from week 4

• School: UTSC
• Department: Economics for Management Studies
• Course: MGEA06H3
• Professor: Iris Au

Document Summary

N we complicate the simple model developed last week and we include government and foreign sector in the model. N consider the effects of a change in aggregate expenditure on national income and budget balance. The government enters the model in the following ways: collecting taxes, t. The government collects taxes from households and firms to finance its spending. In our model taxes are positively related to income, i. e. , where t0 = constant, 1 > t1 > 0. T = t0 + t1y: making transfer payments, tr. Transfer payments refer to payments from the government to individuals that are not in exchange for goods and services. Examples include employment insurance (ei), public pension, and etc. Transfer payments are inversely related to income, i. e. , where tr0 = constant, 1 > tr1 > 0. It is also called government purchases, and it is the government expenditure on final goods and services.