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Chapter 22

# Chapter 22 - o Consumption function = C I So C = 30 0.8(Y D...

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Chapter 22 - Introducing government o Net taxes: Total tax revenue – transfer payements Denoted as T t = net tax rate, increase in net tax revenue when national income rises by one dollar. Marginal propensity to tax. o Surplus: Excess of current revenue over expenditure. Deficit. o When measuring the overall contribtuoon of governemtn expenditure, all levels must be included. - Introducing foreign trade o Marginal propensity to import: m o NX = X – mY Exports are autonomous to Y but Importants are dependen.t o Shifts in Net Export function Changes in foreing income Changes in international relative prices A rise in CDN prices prices relative to other countries reduces CDN exports. A fall increases exports. Depcreciation increases exports, appreciation increases imports - Equilibirum national income o First tax rate t = 10%

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So net tax rate = 10%, thus T = 0.1Y o If 10% is taxed, then 90% is disposable income Y-T= 0.9Y
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Unformatted text preview: o Consumption function = C+I So C = 30 + 0.8 (Y D ) o Thus C = 30 + 0.8*0.9 Y o In the prescene of taxes, the marginal propensity to consumer out of national income is less than the marginal propensity to consumer out of disposable income. o PAGE 553!!-Changes in Equiliburm National Income o z = MP to Spend out of national income o Imports and taxes reduces MP to spend out of national income and reduces value of simple multiplier o With gov + trade 1 / (1-[MPC(1-t)-m) o Increases in national income increase GDP less and less. o Stabilization polcy: Any policy designed to reduce the conomy cuclical fluctation and thereby stablizie national income Gov purchases: Money spent times multiplier Change in tax rate • Increases idposbale income which rotates AE up. • Opposite is also true o Demand detmerined output Closed economy: 1/1-MPC Open: MPC(1-t) -m...
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