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ECO209 - OCT 08.docx

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E ECO209 OCT 08 LEC03 Slide 49 • No indirect taxes, GDP = net domestic income Slide 50 • Taxes: independent of level wealth (autonomous taxes, ex: property taxes), and dependent o Small t: marginal propensity to tax • Transfer payment: assumed to be independent of level of wealth • Recession: no change in government expenditure but level of expenditure decreases and creates a budget deficit Slide 52, 53 • Increase in G decreases the BS but not going to decrease fully by the amount of delta G Slide 54 • Structural deficit: economy is not in recession but there is a deficit o 1) spending too much o 2) level of taxation is too low Slide 55 • Evaluate at full employment output o AE shifts up  Kick starts the economy  Restoring confidence in the private sector o BS shifts down  In the short term, budget deficit increases further • Conservative economist/politician: o Large deficit creates a lack of confidence? Slide 56 Slide 57 • Relation between budget deficit and level of economic activity • Unemployment rate: up, expanding; down, contracting • 1995: decreasing in gov’t expenditure o Transfer payment went down o Revenue going up, economy expanding Slide 62 • Standard of living Case Study • Forbid gov’t from a budget deficit • Questions: o 1) borrow in order to finance a deficit, by issuing new bonds  Private sector may lose confidence  Paying back the loan + interest • Tax may go up in the future • Higher income individual pays more taxes • Those who pay taxes may not directly benefit from expenditure (ex:social program, welfare) o 2) AE is being lowered
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