CH9 SH - Government in the Economy Government Purchases G...

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Unformatted text preview: Government in the Economy Government Purchases ( G ), Net Taxes ( T ), and Disposable income ( Y d ) The Determination of Equilibrium Output (Income) Fiscal Policy at Work: Multiplier Effects The Government Spending Multiplier The Tax Multiplier The Balanced-Budget Multiplier The Federal Budget The Budget in 2007 Fiscal Policy Since 1993: The Clinton and Bush Administrations The Federal Government Debt The Economy’s Influence on the Government Budget Tax Revenues Depend on the State of the Economy Some Government Expenditures Depend on the State of the Economy Automatic Stabilizers Fiscal Drag Full-Employment Budget Appendix A: Deriving the Fiscal Policy Multipliers Appendix B: The Case in Which Tax Revenues Depend on Income The Government and Fiscal Policy The Government and Fiscal Policy Fiscal policy The government’s spending and taxing policies. Monetary policy The behavior of the Federal Reserve concerning the nation’s money supply. FP: 3 categories Policies concerning Govt’s purchases of goods & services Policies concerning taxes Policies concerning transfer payments – unemployment compensation; SS benefits; welfare benefits; veterans benefits – to households Government in the Economy Discretionary fiscal policy Changes in taxes or spending that are the result of deliberate changes in government policy. The Economic Stimulus Act of 2008. $150 Billion in Tax Rebates. $ 787 Billion American Recovery and Reinvestment Act of 2009, ARRA. net taxes ( T ) Taxes paid by firms and households to the government minus transfer payments made to households by the government. disposable, or after-tax, income ( Y d ) Total income minus net taxes: Y- T . Government Purchases ( G ), Net Taxes ( T ), and Disposable Income ( Y d ) disposable income ≡ total income − net taxes Y d ≡ Y − T Government in the Economy Government in the Economy FIGURE 9.1 Adding Net Taxes ( T ) and Government Purchases ( G ) to the Circular Flow of Income Government in the Economy Government Purchases ( G ), Net Taxes ( T ), and Disposable Income ( Y d ) When government enters the picture, the aggregate income identity gets cut into three pieces: Y Y T d ≡ - Y C S d ≡ + Y T C S- ≡ + Y C S T ≡ + + And aggregate expenditure ( AE ) equals: AE C I G = + + Government in the Economy Budget Deficit/Surplus The difference between what a government spends and what it collects in taxes in a given period: G- T . budget deficit ≡ G − T If Govt spends more than it collects, must borrow How? If Govt receives more than it spends, there is a budget surplus Government in the Economy By issuing Treasury bonds & bills… In this case, part of household S goes to G sector. Government in the Economy Adding Taxes to the Consumption Function To modify our aggregate consumption function to incorporate disposable income instead of before- tax income, instead of C = a + bY , we write C = a + bY d or C = a + b ( Y − T ) Our consumption function now has consumption depending on disposable income instead of before-tax income. 11 of 39...
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CH9 SH - Government in the Economy Government Purchases G...

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