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Canada (158,533)
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EC140 (329)
Chapter 29

Chapter 29 EC140.docx

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Angela Trimarchi

BU121 Chapter 29 – Fiscal Policy Week 8 Government Budgets -There is a federal budget, as well as a provincial budget -Fiscal policy is the use of the federal budget to achieve macroeconomic objectives such as full employment, sustained long-tern economic growth, and price level stability Highlights of the 2008 Budget -The three main items are: -Revenues -Outlays -Budget balance Revenues -Revenues come from four sources: -Personal income taxes -Corporate income taxes -Indirect and other taxes -Investment income -Personal income taxes are the taxes paid by individuals on their incomes -Indirect taxes include the GST and taxes of gasoline, alcohol, and a few other items -Corporate income are taxes paid by companies on their profits -Investment income is the income from government enterprises and investments Outlays -Outlays are classified in three categories: -Transfer payments -Expenditure on goods and services -Debt interest -Transfer payments are payments to individuals, businesses, other levels of government and the rest of the world -Expenditures on goods and services are expenditures on final goods and services -Debt interest is the interest on the government debt Budget Balance -The government’s budget balance is equal to its revenues minus its outlays Budget balance = Revenue – Outlays BU121 Chapter 29 – Fiscal Policy Week 8 Debt and Capital -When individuals and businesses incur debt, they usually do so to buy capital – assets that yield a return -In fact, the main point of debt is to enable people to buy assets that will earn a return that exceeds the interest paid on the debt Supply-Side Effects of Fiscal Policy -Fiscal policy has important effects on employment, potential GDP, and aggregate supply Full Employment and Potential GDP -At full employment, the real wage rate adjusts to make the quantity of labour demanded equal the quantity of labour supplied The Effects of the Income Tax -The tax on labour income influences potential GDP and aggregate supply by changing the full employment quantity of labour -The income tax weakens the incentive to work and drives a wedge between the take-home wage or workers and the cost of labour to firms BU121 Chapter 29 – Fiscal Policy Week 8 Taxes on Expenditure and the Tax Wedge -Taxes on consumption expenditure add to the wedge -The reason is that a tax on consumption raises the prices paid for a consumption goods and services and is equivalent to a cut in the real wage rate -The incentive to supply labour depends on the goods and services that an hour of labour can buy Taxes and the Incentive to Save -A tax on interest income weakens the incentive to save and drives a wedge between the after-tax interest rate earned by savers and the interest rate paid by firms Effect of Tax Rate on Real Interest Rate -The interest rate that influences investment and saving plans is the real after-tax rate -The real after-tax interest rate subtracts the income tax rate paid on interest income from the real interest rate -If there is no inflation, the nominal interest rate equals the real interest rate Effect of Income Tax on Saving and Investment -A tax on in
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