EC140 Chapter 22: Introducing Government And Trade
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Adding government and trade to the simple macro model. Budget balance: can be a surplus if t is greater than g or a deicit if g is greater than t. when in deicit the extra money comes from issuing government bonds. The net export shits whenever there is change in foreign income or a change in internaional relaive prices. Because of government taxaion there must be a change in the cf due to a variable that afects disposable income. Ae = ( c + i + g + x ) + ( mpc ( 1 - t ) - m ) y. The simple muliplier z = mpc ( 1 - t ) - m. Any change in an autonomous value of the ae funcion will shit the ae curve by the same value and income by the same amount value imes the muliplier. The larger the marginal propensity to import (m), the lower the simple muliplier.