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Chapter 22

Economics 102: Chapter 22

5 Pages
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Department
Economics
Course Code
ECON 102
Professor
Robert Gateman

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Economics 102: Principles of Macroeconomics Chapter 22 22.1 Introducing Government  Fiscal policy: use of government's tax and spending policies to achieve government goals o Government spending and taxation influences national income in the short/long run Government Purchases:  Government purchases are part of aggregate desired expenditure (adds to output demand)  Government transfer payments effect aggregate expenditure o Transfer payment are added to disposable income  Level of government purchases (G) is autonomous with respect to national income (Y) o As GDP rises or falls, the level of government transfer payments will often change  Assume that G does not automatically change just because GDP changes Net Tax Revenues:  Taxes reduce, and transfer payments raise disposable income relative to national income  Net taxes (T): total tax revenue minus transfer payments o Disposable income is less than national income (two-thirds of GDP in 2010)  Tax revenues vary directly with the level of Y, tax rate is an autonomous policy variable o As national income rises, a tax system with given tax rates will yield more revenue o  Net tax rate: increase in net tax revenue generated when national income rises by one dollar o Also called the marginal propensity to tax The Budget Balance:  Difference between total government revenue and total government expenditure o ( ) ( )  Budget surplus: any excess of current revenue over current expenditure o Government uses excess revenue to buy back outstanding government debt  Budget deficit: any shortfall of current revenue below current expenditure o Must borrow the excess of spending over revenues through bonds or treasury bills Provincial and Municipal Government:  Combined provincial and municipal government purchases exceed federal purchases  Federal tax revenue is equal to provincial and municipal but it makes transfer payments  All governments are included in overall contribution of government aggregate expenditure Summary:  All levels of government add directly to desired aggregate expenditure through purchases  Governments collect tax revenue and make transfer payments  Net tax does not directly represent any expenditure on goods/services o Net tax is not included in the AE function  Will enter the AE function indirectly through disposable income Economics 102: Principles of Macroeconomics 22.2 Introducing Foreign Trade Net Exports:  Exports will most often not change as a result of changes in national income o Depend on decisions made by foreign households and firms o Exports are treated as autonomous expenditure  Imports depend on the spending decisions of Canadian households and firms o As consumption rises, imports will also increase o There is a positive relationship between imports and national income o  Marginal propensity to import (m): increase in import expenditure from a $1 increase in Y  ( ) o Net exports are negatively related to national income Shifts in the Next Export Function:  Net export function: everything affecting NX, except domestic Y, remain constant o Foreign Y and internal relative prices must be held constant  A change in either factor will shift the net export function  Anything affecting Canadian exports will shift the next export function parallel to itself o Upward if exports increase, and downward if exports decrease  Anything affecting the proportion of income (MPC) that Canadian consumers want to spend on imports will change the slope of the net export function Changes in Foreign Income:  Increase in foreign income, ceteris paribus, will increase Canadian exports o Causes the X curve to shift upward and the NX function to shift up parallel to itself  Fall in foreign income leads to a reduction in Canadian exports  Shift down of the net exports function Changes in International Relative Prices:  Changes in prices of Canadian goods relative to foreign goods will effect imports/exports o These changes will shift the net export function  Increase in Canadian prices, the value of Canadian exports will fall (X curve shifts down) o Imports will become cheaper relative to the prices of Canadian made goods o Shift expenditure away from Canadian goods, and towards foreign goods o IM curve rotates up, and the NX function shifts down and becomes steeper  Fall in Canadian prices increases net exports at any level of national income  Canadian dollar depreciation shifts expenditure from foreign goods towards Canadian o Imports will decrease and exports will increase (net export functions shifts upward) o The IM curve rotates downward, net export function shifts up and becomes flatter Summary:  Changes in foreign income and international relative prices will affect Canadian exports  C, I and G include some import content o C is positively related to Y, IM are also positively related to national income  AE function shows desired aggregate expenditure on domestic products (IM is subtracted) Economics 102: Principles of M
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