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Chapter_7 - Warning The purpose of these lecture notes is...

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Warning: The purpose of these lecture notes is just to aid you in studying, and they are not designed to replace the textbook or the lectures. Technical problems with the web site do not absolve you of responsibility for lecture material. If you choose to skip a lecture and rely on the web site lecture notes, you do so at your own risk. For tests and exams you are responsible for all material covered in lecture, including material on the chalkboard and overhead projector. If you missed a lecture, be sure to get the complete lecture notes from another student. Chapter Seven Government and International Trade Learning Outcomes This chapter explains: The size of the government and international trade sectors of Canadian Economy How the government sector is included in the circular flow How taxes and government expenditure affect equilibrium real GDP The government’s budget function and budget balance Fiscal policy and the government’s budget function and budget balance Automatic stabilizers and discretionary fiscal policy The public debt and the government’s budget balance International trade and its effect on equilibrium income and output Government, international trade, and aggregate demand Government spending affects aggregate expenditure The management of government revenues and expenditures has implications beyond just adding to aggregate expenditures Fiscal Policy is the use of government taxing and spending power to change output and employment Government Expenditure, Taxes, and Equilibrium Real GDP Adding government expenditure (G) to Aggregate expenditure (AE) AE = C + I + G G = G 0 But taxes and transfer payments affect consumption Net tax, NT = tY , t net tax rate YD = Y – NT = (1-t)Y Government Expenditure, Taxes, and Equilibrium Real GDP Assume C = 20 + 0.8DI T = 15%
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