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Unformatted text preview: 11/04/11 - Fiscal Policy Equilibrium Conditions: GDP (AS) = AE S = I Undesired Inventory Change = 0 Government Expenditure: Adding net taxes, and government purchases to the circular flow of income Government is a spender in the macro-economy acts as a taxer (households and firms play taxes) o Externalities/public goods: where there is a market failure, where social costs are not equal to private costs o Legal system: Property rights, copyright, antitrust policies (competition) o 1946 Employment Act: Government takes responsibility for economic performance, discretionary fiscal policy o Political functions o Income distribution Leakage Definition: A non-consumption use of income, including saving, taxes, and imports. Leakages are combined with injections in the injection-leakage model used to identify equilibrium aggregate output in Keynesian economics. The notion of leakage is best viewed through the circular flow, in which saving, taxes, and imports are "leaked" out of the main flow between output, factor payments, national income, and consumption. Fiscal Policy: Expenditure and Taxation Policy Discretionary fiscal Policy: Changes in taxes or spending that are the result of deliberate changes in government policy, to try and affect macroeconomic Tax policy o Marginal/Average Rates: marginal rates is what is paid on the next dollar earned, as long as the...
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