Chapter 22

Chapter 22 - Chapter 22: Adding Government and Trade to the...

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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 Government Purchases When the government hires a bureaucrat, buys office supplies, or purchases fuel for the Canadian Forces, it is adding directly to the demands for the economy’s current output of good and services. Hence, desired government purchases, G, are part of aggregate desired expenditure. Transfer payment: unilateral payments made between various sectors of the economy such as households, businesses, governments, and non-residents (i.e. Welfare or employment-insurance benefits) affects aggregate expenditure Chapter assumptions: Level of government purchases, G, is autonomous with respect to the level of national income o As GDP rises or falls, the level of government’s transfer payment will generally change, but we assume that G does not automatically change just because GDP changes o We view any change in G as a result of government policy decision Net Tax Revenues Taxes reduce household’s disposable income relative to national income, whereas transfer payments raises disposable income relative to national income Net taxes (T): total revenue minus transfer payments T = tY Net tax rate (t): the increase in net tax revenue generated when national income rises by one dollar. Also called the marginal propensity to tax. The Budget Balance The difference between total government revenue and total government expenditures, it equals net tax revenue minus government purchases, T-G Budget surplus: Any excess of current revenue over current expenditure Budget deficit: Any shortfall of current revenue below current expenditure When the two amounts are equal, the government has a balanced budget Private saving: Saving on the part of households – the part of disposable income that is not spent on
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This note was uploaded on 04/17/2008 for the course ECON 295 taught by Professor Ragan during the Winter '08 term at McGill.

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Chapter 22 - Chapter 22: Adding Government and Trade to the...

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