Class Notes (839,092)
Canada (511,185)
Economics (1,590)
ECO102H1 (155)
Lecture

ECO100 - FEB 6 Gov't spending and taxes

4 Pages
110 Views

Department
Economics
Course Code
ECO102H1
Professor
James Pesando

This preview shows page 1. Sign up to view the full 4 pages of the document.
Description
1. Summary ● National Income Determination with fixed prices ○ where desired expenditure = actual output ○ AE = Y ○ AE = C + I + G + X - M ■ Autonomous Expenditure: independent of Y ● intercept on the graph ■ Induced Expenditure: dependent of Y ● slope characteristic of the function 2. Gov’t Spending and Taxes ● 1) Government Spending (G) depend upon ○ Often, political determinants (usually autonomous) ○ “Spend your way out of a recession” ○ To fund G, governments need to collect taxes ● 2) Taxes (T) depend upon ○ National income ■ Marginal propensity to tax = tax rate = t ■ T = t* Y ○ Taxes will indirectly impact AE through consumption ■ Impacts consumers ● 3) Disposable income: YD = Y - T ○ Amount of income consumer actually has after paying taxes ○ Should update the C function where the gov’t exists ■ C = C0 + C1 (YD) ● C0: Autonomous consumption ● C1: Marginal propensity to consume of disposable income ■ C = C0 + C1 (Y-T) ● 4) Budget Balance: Total tax revenue less total government expenditure ○ T - G ○ If T - G: Balanced Budget ■ no debt, no extra money ○ If T > G: Budget surplus ○ If T< G: Budget deficit 3. Extended Model Example ● Suppose following relationships hold: ○ C = 10 + 0.9YD ○ T = 0.2Y ○ I = 25 ○ G = 17 ○ X = 24 ○ M = 0.1Y ● 1. Calculate the AE schedule ○ Rewrite the consumption function as a function of Y ■ C = 10 + 0.9YD ■ C = 10 + 0.9 (Y-T) ■ C = 10 + 0.9 (Y - 0.2Y) ■ C = 10 + 0.72Y ○ AE = C + I + G + X - M ■ AE = (10 + 0.72Y) + 25 + 17 + 24 - 0.1Y ■ AE = 76 + 0.62Y ● 2. Calculate the equilibrium level of national income? ○ In equilibrium AE = Y* ■ 76 + 0.62Y* = Y* ■ Y* = 200 ● 3. Graph the AE schedule. Clearly label the axes, the equilibrium level of national income, and any intercepts ● 4. All else equal, suppose government spending increases to 26.5 (from 17) . Use the multiplier to calculate the new equilibrium level of national income. ○ Since the slope of the AE function is 0.62, and thus the multiplier is: ■ 1/(1- Slope AE) = 2.63 ○ Thus, as the increase in autonomous government expenditure cycles through the economy, it causes subsequent increase in induced
More Less
Unlock Document

Only page 1 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit