ECO102H1 Lecture Notes - Lecture 6: Open Economy, Government Budget Balance, Tax Rate
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ECO102H1 Full Course Notes
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Government budget balance: g = net tax revenue = t = ty. For every dollar of national income (y), the government collects ty (t = marginal tax rate) For simplicity, no lump-sum taxes (autonomous taxes: disposable income (yd) changes, in the simple model, yd = y, now, yd = y ty. Ae = c + i + g: c = c + mpcyd, yd = y ty, i = g. To solve for ae function: get consumption function in terms of y, not yd, add up consumer, investment and government spending to get the ae function. C = c + mpc[(1-t)y], wherec + mpc(1-t)y, i = g, ae = c + i + g+ mpc(1-t)y, ae = a + zy.
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