ch12.ppt

Macroeconomics Chapter 12 Data on Government Expenditure Government expenditure is the dollar amount spent at all levels of government for Data on Government Expenditure Data on Government Expenditure Data on Government Expenditure Data on Chinese Government Expenditure The Government’s Budget Constraint Government budget constraint: total uses of funds = total sources of funds Gt + Vt = Tt + ( Mt? Mt?1)/ Pt real purchases+ real transfers = real taxes+ real revenue from money creation The Government’s Budget Constraint Gt represent government purchases in real terms for year t. Ct + It + Gt, is the aggregate real spending on goods and services in year t. Vt represent the government’s real expenditure on transfers. The real value of this revenue for year t is (Mt ?Mt?1)/Pt Tt be the total real taxes collected by the government in year t. The Government’s Budget Constraint Government budget constraint Gt + Vt = Tt real purchases+ real transfers= real taxes Public Production The government subcontracts all of its production to the private sector. Public investment, publicly owned capital, and government employment are zero. The Household’s Budget Constraint Household budget constraint Ct + (1/P)·?Bt+?Kt = (W/P)t·Lst + rt?1·( Bt?1/P + Kt?1) The Household’s Budget Constraint Multiyear household budget constraint with transfers and taxes: C1 + C2/(1+r1) + · · · = (1+r0)·( B0/P+K0) +(w/P)1·Ls1 +(w/P)2 · Ls2 /(1+r1) + ·· · +( V1 ? T1) + ( V2 ? T2)/( 1 + r1) +( V3 ? T3)/[(1+ r1) · ( 1 + r2) ] + ·· · Permanent Changes in Government Purchases Theory G+ V = T or V ? T = ?G G rises by one unit each year, V ? T falls by one unit each year. household’s disposable real income falls by one unit each year. Permanent Changes in Government Purchases Theory Since the typical household has one less unit of real disposable income each year, we predict that the decrease in C each year will be roughly by one unit.