Introduction MACROECONOMICS MACROECONOMICS Dr. Nimantha Manamperi.
AP Macroeconomics Chapter 4: Adding the Government to the Economic Equation.
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Transcript of AP Macroeconomics Chapter 4: Adding the Government to the Economic Equation.
![Page 1: AP Macroeconomics Chapter 4: Adding the Government to the Economic Equation.](https://reader035.fdocuments.in/reader035/viewer/2022062322/56649eb45503460f94bbc022/html5/thumbnails/1.jpg)
AP Macroeconomics
Chapter 4:
Adding the Government to the Economic Equation
![Page 2: AP Macroeconomics Chapter 4: Adding the Government to the Economic Equation.](https://reader035.fdocuments.in/reader035/viewer/2022062322/56649eb45503460f94bbc022/html5/thumbnails/2.jpg)
5 key roles of Government
1-legal framework2-maintain competition
Monopolies vs. natural monopolies3-redistribution of income
Transfer paymentsMarket intervention taxes
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4-reallocation of resources
Market failureSpillovers or externalities
CAN BE A SPILLOVER COST OR SPILLOVER BENEFIT
Spillover costsHow to fix this??
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Spillover Benefits
Gov’t wants more of a good produced because it is good for society
Market demand curve understates total benefitsHow to fix this?
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TYPES OF GOODS
PRIVATE Competitive market Rivalry excludability
PUBLIC No rivalry No exclusion Free rider problem
QUASI PUBLIC-could be done thru
market systemBut would be underproduced
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5th-promote stability
UNEMPLOYMENT What can the gov’t
do to fix this?
Gov’t spending Taxes Central bank*
INFLATION What can the gov’t
do to fix this?
Gov’t spending Taxes *central bank
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Adding Gov’t to the Circular Flow
Net Taxes=Taxes in reverse
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Exhaustive vs. Non-Exhaustive Purchases
Exhaustive Directly absorb
resources thru gov’t purchase
Examples:
Non-Exhaustive Transfer payments No current use of
resources No contribution to
domestic output
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Gov’t Spending vs. Revenue
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Taxes
Taxes levied on taxable income after exemptions
ProgressiveMarginal tax rate
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State and Local Gov’t
State Gov’t Revenue
47% sales & excise 36% income tax
Expenses 36% education 25% public welfare 8% health/hospitals
Local Gov’t Revenue
72% property taxes 17% sales & excise
Expenses 44% education 12% health/welfare
& hospitals Other—state/fed/
utilities