7 - macro econ

• Fiscal policy

  The use of the government's tax and spending policies to achieve government objectives
• Government purchases (G)

  Desired government purchases, part of aggregate desired expenditures
• The level of government purchases is assumed to be autonomous with respect to the level of national income
• Net tax revenue (T)

  Total tax revenue minus transfer payments, positively related to national income (Y)
• Disposable income (YD)

  The amount households receive after taxes are paid and transfers are received, equal to Y - T
• Budget balance

  The difference between total government revenue and total government expenditure, equal to T - G
• When net revenues exceed purchases, the government has a budget surplus
• When purchases exceed net revenues, the government has a budget deficit
• When the two amounts are equal, the government has a balanced budget
• All levels of government add directly to desired aggregate expenditure through their purchases of goods and services (G)
• Governments collect tax revenue and make transfer payments, and net tax revenues (T) are positively related to national income
• Net exports (NX)


  Exports (X) minus imports (IM)
• Exports depend on spending decisions made by foreign households and firms, and are treated as autonomous expenditure
• Marginal propensity to import (m)

  The increase in import expenditures induced by a $1 increase in national income
• Net exports are negatively related to national income
• An increase in foreign income

  Increases the quantity of Canadian goods demanded by foreign countries, shifting the X curve upward and the NX function upward
• A rise in Canadian prices relative to foreign prices

  Reduces Canadian exports and raises the import function, shifting the NX function downward
• A depreciation of the Canadian dollar means foreigners must pay less of their money to buy one Canadian dollar, and Canadians must pay more Canadian dollars to buy foreign currency
• Aggregate expenditure (AE) function

  AE = C + I + G + (X - IM)
• Marginal propensity to spend out of national income (z)

  z = MPC(1 - t) - m
• The equilibrium level of national income is where desired aggregate expenditure equals actual national income (AE = Y)

  
• Simple multiplier

  Measures the change in equilibrium national income that results from a change in the autonomous part of desired aggregate expenditure, equal to 1/(1 - z)

  
• In Canada, if MPC = 0.8, t = 0.25, and m = 0.35, the simple multiplier is 2.5
• If the net export function shifts upward

  The AE function will also shift upward and equilibrium national income will rise
• If the net export function shifts downward

  The AE function will also shift downward and equilibrium national income will fall
• If exports increase by $1 billion, equilibrium national income will increase by $1 billion times the simple multiplier
• Fiscal policy tools

  The net tax rate (t) and government purchases (G)
• A reduction in the net tax rate or an increase in government purchases

  Shifts the AE curve upward, increasing equilibrium national income
• Equilibrium national income is the level at which desired aggregate expenditures equals actual national income (AE = Y)