Textbook Notes (363,507)
Canada (158,391)
Economics (479)
ECO102H1 (54)
Chapter 22

ECO100Y1 Chapter 22 Notes

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University of Toronto St. George
Robert Gazzale

ECO100Y1 Textbook Notes Chapter 22 22.1 Introducing Government  Fiscal policy: the use of the government’s tax and spending policies to achieve government objectives. o It influences national income in both the short and the long run.  When a government makes purchases, it is adding directly to the demands for the economy’s current output of goods/services.  Government transfer payments affect AE only through the effect these transfers have on households’ disposable income.  Assumption is made that the level of government purchases, G, is autonomous with respect to the level of national income.  Net taxes: total tax revenue minus transfer payments, denoted T.  Where t is the net tax rate. o Net tax rate: the increase in net tax revenue generated when national income rises by one dollar. Also called the marginal propensity to tax.  Budget balance: the difference between total government revenue and total government expenditure.  Budget surplus: any excess of current revenue over current expenditure. o The surplus is used to purchase back existing government debt.  Budget deficit: any shortfall of current revenue below current expenditure. o In this case, government’s have to borrow the excess spending by issuing additional government debt (bonds/treasury bills).  The federal government raises about the same amount of tax revenue as do the provincial and municipal governments combined but transfers a considerable amount of its revenue to the provinces.  When measuring the overall contribution of government to desired aggregate expenditure, all levels of government must be included.  **Recall** YD= Y – T 22.2 Introducing Foreign Trade  Canada exports roughly 3% of all the goods/services produced in it.  U.S.-Canadian trade is the largest two-way flow of trade between any two countries in the world today.  Typically, exports will not change as a result of changes in Canadian national income. o Thus treated as autonomous expenditure.  Imports depend on the spending decisions of Canadian households and firms. o Almost all consumption goods have an import content. o Since consumption rises with national income, imports will rise with national income as well.  Where m is the marginal propensity to import. o Marginal propensity to import: the increase in import expenditures induced by a $1 increase in national income. Denoted by m.  In our simple model,  The above function is called the net export function. o Net exports are negatively related to national income.  Anything affecting Canadian exports will shift the net export function parallel to itself. o Up if exports increase (vice-versa).  Anything affecting the proportion of income that Canadian consumers want to spend on imports will change the slope of the net export function.  A change in foreign income will affect both the X curve as well as the NX curve. o An increase in foreign income will increase demand for Canadian goods.  A shift up in X and a shift up in NX. o A decrease in foreign income will decrease demand for Canadian goods.  A shift down in X and a shift down in NX.  A change in international relative prices will cause both imports and exports to change (in turn, will shift the NX function). o A rise in Canadian prices relative to those in other countries will:  Increase demand for imports in Canada and reduce demand for Canadian products abroad.  X function will shift down; IM curve will rotate up.  IM curve will rotate up because Canadian will spend a higher fraction of national income on imports. o A fall in Canadian prices relative to those in other countries will:  Decrease demand for imports in Canada and increase demand for Canadian products abroad.  X function will shift up; IM curve will rotate down.  A depreciation in the Canadian dollar means that less of a foreign currency is needed to purchase $1 Canadian and $1 Canadian will purchase less of a foreign currency. o This will result in less i
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