4.

1 Government

Government Purchases

• Fiscal policy involves the government’s plans for taxes and spending.
• Government purchases of goods and services directly contribute to aggregate desired.
• Transfers payments, such as welfare or subsidies, indirectly affect aggregate expenditure
through the recipients’ spending.
o Ex: during the pandemic when the government gave people the CERB money, those
people in turn used that money to buy goods and services.
• In the macro model, government purchases (G) are assumed to be autonomous and not
automatically affected by changes in the national income.
- Autonomous means: it is not directly related to income; the expenditure will happen
regardless of income (is fixed)

Net Tax Revenue

• Taxes decrease disposable income relative to national income, while transfer payments increase
disposable income.
• Net tax revenue (T) is calculated as total tax revenue minus total transfer payments made by the
government.
• The net tax rate (t) represents the increase in net tax revenue when GDP (Y) increases by $1

(Y)= income

The Budget Balance

• The budget balance is the difference between total government revenue and total government
expenditure.

• A budget surplus occurs when net tax revenue exceeds government purchases, indicating excess
revenue. T>G positive
• A budget deficit occurs when government purchases exceed net tax revenue, indicating excess
spending. T<G negative
• A balanced budget occurs when net tax revenue equals government purchases. T=G
*Net tax rate= taxes that are charged to people

*Net tax revenue= what the government gets from collecting taxes

4.2 Trade

Foreign Trade

• In the macro model, desired aggregate expenditure (AE) includes net exports (X-IM), where
exports (X) are treated as autonomous expenditure and imports (IM) are induced by the
spending decisions of Canadian households and firms.
o Exports do not change based on national income, but imports d.
▪ Imports are based on national income and the marginal propensity
to import (m).
- More money more import/ less money less imports

• The net export function illustrates that as national income rises, net export fall due to the
increase in imports relative to exports.
o m is the marginal propensity to import
 o the percentage of every next dollar of national income that will be spent on imports
o ex. If m=0.05, and national income (Y)=100, then imports= 0.05(100) =5

Factors Affecting Foreign Trade

• Changes in foreign income

o An increase in foreign income leads to an increase in Canadian exports, shifting the net
export function upward. (parallel)
o A decrease in foreign income leads to a decrease in Canadian exports, shifting the net
export function downward.
• Changes in international relative prices
o If Canadian prices rises relative to foreign prices, Canadian exports decrease, and
imports increase. This causes the net export function to shift downward.
o The opposite happens if Canadian prices fall relative to foreign prices.
• The exchange rate
o A depreciation of the Canadian dollar leads to an increase in Canadian exports and a
decrease in imports shifting the net export function upward.
 - Domestic income= Canada makes more money
- NX= (X-IM) = anything that increases imports, decreases net exports
- Domestic price= the price of things at home, price of goods at Canada
- Export= exit the country, what other countries buy from Canada
- Import= what comes to the county, what Canada buys from other countries
- Exchange rate= our currency became weaker
• Parallel shifts only happens in a change of foreign income
• Domestic income have no change in the line

4.3 Equilibrium

The simple macro model

Adding Government and Foreign Trade

• The slope of the AE function is called the marginal propensity to spend (z).
• Just think logically if they decrease taxes people will have more money so the AE will go up
Changes in the Equilibrium

Shift in the AE Function

• Happens when either consumption or investments shift up or down.

• An upward shift increases the equilibrium, and a downward shift decreases the equilibrium
• If the MPC changes, the curve rotates but stays on the same intercept.
• If the autonomous expenditure changes, there is a parallel shift of the entire curve
5.1 Real GDP and Price Level

Aggregate Demand

• The total demand for goods and services within a particular market.
• The aggregate demand (AD) curve shows the relationship between the price level and the
equilibrium level of real GDP.
• Changes in the price level cause movements along the AD curve, not shifts of the curve itself.
• Changes in autonomous expenditure components (consumption, investment, government
spending, net exports) can cause shifts in the AD curve.
o These are called aggregate demand shocks
▪ An increase in spending causes AD to shift right, this is called a
positive shock.
▪ A decrease in spending causes AD to shift left, this is called a
negative shock.

- If price levels increase (things in general are more expensive), then consumers have less
purchasing power, they cannot buy as many goods anymore because things are more
expensive. Consumption decreases, so GDP decreases.
- This is why AD is downward sloping.
 - Change in price levels, shift AE movement, movement AD
- When you move along the AD line with no shift, is a rise or decrease in PRICE LEVEL

Aggregate Supply

• The total supply of goods and services available to a particular market from producers
• The aggregate supply (AS) curve relates the price level to the quantity of output that firms would
like to produce and sell.
• Firms generally increase production only if they can change higher prices to cover their higher
unit cost.

The slope of AS

• Typically flatter when GDP is low.

o Can be completely horizontal (the Keynisian Range)
• As GDP rises, the slope increases
o As GDP rises firms begin to produce beyond their capacity. This increases costs (overtime
wages for example)
o Firms will only produce beyond their capacity if the price levels rise significantly.

Shifts in the Aggregate Supply Curve

• The aggregate supply (AS) curve shifts when there are changes in technology or factor prices.
• Aggregate supply shocks, represented by shifts in the AS curve, play a significant role in
explaining real-world changes in equilibrium GDP and the price level.
Simple Multiplier vs Multiplier

• The simple multiplier measures the horizontal shift in the demand curve.
• The multiplier measures the change in the equilibrium GDP.
Exercises min 42.48/ 57.55

*MPC, GOES TO YOUR INCOME= MPCxY