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Chapter 22

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ECON 102
Ying Kong

TEXTBOOK NOTES 2/21/2013 1:51:00 PM INTRODUCING GOVERNMENT - a governments fiscal policy is defined by its plans for taxes and spending Government Purchases - government purchases are apart of aggregate desired expenditure because they add directly to the economy’s demand - transfer payments (welfare & employment insurance) add to the desired aggregate expenditure, but indirectly  increases household disposable income, increases household consumption, increase in aggregate expenditure - now we assume that government purchases are autonomous to GDP Net Tax Revenues - taxes reduce household income in relation to national income - transfer payments increase household income in relation to national income - Net taxes is the total tax revenue received by the government minus the total transfer payments made by the government - because transfer payments are smaller than tax revenue, net tax is positive - net tax revenues vary with the national income (GDP) but tax rate remains autonomous - GOVERNMENT NET TAX REVENUES: T = tY  t = net tax rate / marginal propensity to tax o the net tax rate is the increase in net tax revenue generated by an increase in national income by $1 The Budget Balance - the budget balance is difference between total government revenue and total government expenditure  equal to T - G - budget surplus  T>G - budget deficit  T eq (45° line)  desired consumption is less than national income  inventories increase  firms produce less  national income decreases CHANGES IN EQUILIBRIUM NATIONAL INCOME The Multiplier with Taxes and Imports - the presence of imports a
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