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Canada (161,710)
Economics (385)
ECO100Y5 (290)
Chapter 22

Chapter 22- Adding Government and Trade to the Simple Macro Model.docx

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Kalina Staub

Chapter 22- Adding Government and Trade to the Simple Macro Model 22.1 Introducing Government • Fiscal Policy- The use of the government’s tax and spending policies to achieve government objectives Government Purchases • Desired government purchases, G, are part of aggregate desired expenditure  Government hires public servant, buys office supplies, purchases fuel for Canadian Forces, etc  Adding directly to demands of economy’s current output of g/s • Transfer payments also affect aggregate desired expenditure but only indirectly  Welfare, employment insurance benefits, etc  Place no direct demand on nation’s production of g/s since they merely transfer funds to the recipients  Government transfer payments do affect aggregate expenditure but only through the effect these transfers have on households’ and firms’ spending • Level of government purchases, G, is autonomous with respect to level of national income • As GDP rises/falls, level of government transfer payments will generally change, but we assume that G does not automatically change just because GDP changes Net Tax Revenues • Net Tax Revenue- Total tax revenue minus transfer payments, denoted by T  T is not in included directly in the AE function because it does not represent any expenditure on g/s  T will enter AE function indirectly through effect on disposable income (Yd) and consumption • Positive because transfer payments are smaller than total tax revenues • As national income rises, a tax system with given tax rates will yield income tax in total even though the tax rates are unchanged and governments will reduce transfers to households • Net Tax Rate- The increase in net tax revenue generated when national income rises by one dollar, denoted by t  t is not the rate on one specific type of tax, it is the amount by which total government tax revenues (less transfers) change when national income changes • T = tY The Budget Balance • Budget Balance- The difference between total government revenue and total government expenditure  Net Tax revenue – Government purchases (T-G) • Budget Surplus- Any excess of current revenue over current expenditure (T>G)  Uses the excess revenue to buy back outstanding government debt • Balanced Budget- When the two amounts are equal • Budget Deficit- Any shortfall of current revenue below current expenditure (T
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