Mana Econ Notes

Mana Econ Notes - xMana Econ Notes Apendex1 Sept 26th...

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xMana Econ Notes. Apendex1 Sept. 26 th Government expenditure = tax revenue + borrowing Debt service payment – payments that represent the interest owed on a current stock of debt Government expenditure is divided between purchases of goods and services, its debt service payment and its transfer payments which is included in T, the net tax revenues G + iD = T + Borrowing Borrowing = (G + iD) – T = ΔD Budget deficit = any shortfall of current revenue (T) below current expenditure and is equal to the change in borrowing per year Government debt – the outstanding stock of financial liabilities for the government, equal to the accumulation of past budget deficits – falls when deficit becomes –ve dc Budget surplus – excess of current revenue over current expenditure Debt service payments are not discretionary while levels of T and G are Primary budget deficit = the difference between the govs overall budget deficit and its debt service payments = T – G In recent years we have had a primary budget surplus but overall deficit Deficits in Cnada: High deficit in 1982 from recession because of fiscal expansion and large debt to repay with high interest High debt taken out in wartimes – then decline in debt/GDP ratio till late 70s Eco slowdown in 76 resulted in more debt being taken out Policy of minimizing deficit Past several years – small surplus Provincial level: large debt in 90s and are eliminating the deficits till now Fiscal policy is one, but not the influence on budget deficit T depends on level of income which changes with constant policy Expenditures and debt service payments constant over short periods Therefore, deficit is larger in recessions and small in booms Budget deficit function: o Y axis: budget deficit X axis: real GDP o Therefore it is downward sloping straight line o Expansionary policy shifts deficit line up
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o So fiscal policy determines position of function and level of Y determines level of deficit along the function Cyclically adjusted deficit: An estimate of what the gov budget deficit would be if real GDP were at its potential level CAD can only be estimated (potential is an estimate) In times of recession – actual deficit is more then CAD because potential will be greater then Y, giving larger T and less deficit CAD is better at showing changes in fiscal policy Debt to GDP ration: Δd = x + (r – g)d D – the debt to GDP ratio X –governments primary deficit as a percentage of GDP R – real interest rate on gov bonds o Since d is a real variable, it depends on the real ineterst rate G – growth rate of real GDP If the real interest rate on gov bonds exceeds the growth rate of real GDP, stabilizing the debt to GDP ratio requires a budget surplus (-ve x). Set Δd to zero and then calculate x National saving = private saving + gov saving = private saving – gov deficit Government debt is a postponed tax liability. An increase in the budget deficit today must be
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Mana Econ Notes - xMana Econ Notes Apendex1 Sept 26th...

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