The budget deficit equivalent to total government spending tax minus total government spending income tax independently, but depend on the net income, Fiscal policy – the government’s decisions about spending and taxes • Stabilisation policy – government actions to try to keep output close to its potential level • Budget deficit – the excess of government outlays over government receipts • National debt – the stock of outstanding government debt | Chapter 21 The determination of national income David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith Aggregate output in the short run Potential output the output the economy would produce if all factors of production were fully employed Actual output what is actually produced in a period which may diverge from the potential level 21. See the introduction to Chapter 21 in the main text. Some simplifying assumptions Prices and wages are fixed The actual quantity of total output is demand-determined this will be a “Keynesian” model For now, also assume: no government no foreign trade Later chapters relax these assumptions 21. These assumptions underlie the analysis of this Chapter, but will all be relaxed in later Chapters. See the introduction to Chapter 21 in the main text. Aggregate demand Given no government and no international trade, aggregate demand has two components: Investment firms’ . | Chapter 21 The determination of national income David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith Aggregate output in the short run Potential output the output the economy would produce if all factors of production were fully employed Actual output what is actually produced in a period which may diverge from the potential level 21. See the introduction to Chapter 21 in the main text. Some simplifying assumptions Prices and wages are fixed The actual quantity of total output is demand-determined this will be a “Keynesian” model For now, also assume: no government no foreign trade Later chapters relax these assumptions 21. These assumptions underlie the analysis of this Chapter, but will all be relaxed in later Chapters. See the introduction to Chapter 21 in the main text. Aggregate demand Given no government and no international trade, aggregate demand has two components: Investment firms’ desired or planned additions to physical capital & inventories for now, assume this is autonomous Consumption households’ demand for goods and services so, AD = C + I 21. See Section 21-2 of the main text. Consumption demand Households allocate their income between CONSUMPTION and SAVING Personal Disposable Income income that households have for spending or saving income from their supply of factor services (plus transfers less taxes) 21. See Section 21-2 of the main text. Consumption and income in the UK at constant 1995 prices, 1989-1998 Income is a strong influence on consumption expenditure – but not the only one. 21. See Section 21-2 of the main text. Figure 21-1 shows a similar picture but for a longer time period, which creates a stronger impression of linearity in the relationship. The data shown here are measured at constant 1995 prices. The consumption function Income Consumption C = 8 + Y The consumption function shows desired aggregate consumption at each level of
