Chapter 18 - Extending the analysis of aggregate supply. We will analyze how aggregate demand and supply change as we move from the short run to the long run. We will apply this model to cost-push inflation, demand-pull inflation, and economic growth. The Phillips curve is introduced along with the impact of taxes and aggregate supply and taxes and economic growth. | Chapter 18 Public Finance: Expenditures and Taxes Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. This chapter addresses the main sources of government revenue and categories of government spending. We discuss and summarize the different philosophies regarding the distribution of a nation’s tax burden. We explain the principles relating to tax shifting, tax incidence, and the efficiency losses caused by taxes. It also discusses how the distribution of income between the rich and poor is affected by government taxes, transfers, and spending. Government and the Circular Flow (1) Costs RESOURCE MARKET PRODUCT MARKET BUSINESSES HOUSEHOLDS (4) Goods and services (7) Expenditures (8) Resources (9) Goods and services (4) Goods and services (10) Goods and services Net taxes (12) Net taxes (11) (3) Consumption expenditures (3) Revenues GOVERNMENT (2) Land, labor, capital Entrepreneurial | Chapter 18 Public Finance: Expenditures and Taxes Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. This chapter addresses the main sources of government revenue and categories of government spending. We discuss and summarize the different philosophies regarding the distribution of a nation’s tax burden. We explain the principles relating to tax shifting, tax incidence, and the efficiency losses caused by taxes. It also discusses how the distribution of income between the rich and poor is affected by government taxes, transfers, and spending. Government and the Circular Flow (1) Costs RESOURCE MARKET PRODUCT MARKET BUSINESSES HOUSEHOLDS (4) Goods and services (7) Expenditures (8) Resources (9) Goods and services (4) Goods and services (10) Goods and services Net taxes (12) Net taxes (11) (3) Consumption expenditures (3) Revenues GOVERNMENT (2) Land, labor, capital Entrepreneurial Ability (2) Resources (5) Expenditures (6) Goods and services LO1 We integrate government as a decision maker into the circular flow model. Note that government employs resources from the resource market and buys goods and services from the products market. Government then provides goods and services to households and businesses. This is all financed through the net taxes (taxes minus transfer payments) that they receive from households and businesses. Government Finance Government purchases Exhaustive Transfer payments Nonexhaustive Borrowing and deficit spending Opportunity cost is low during recession; high during growth LO2 Government purchases are exhaustive and directly absorb resources. The goods and services purchased by the government are a part of GDP. Transfer payments do not contribute to GDP because recipients don’t make any contributions to current GDP. Social security, welfare payments, veterans’ benefits, and unemployment compensation are examples of transfer .
