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Published byCornelius McCormick Modified over 9 years ago
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AP Macroeconomics Chapter 4: Adding the Government to the Economic Equation
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5 key roles of Government 1-legal framework 2-maintain competition Monopolies vs. natural monopolies 3-redistribution of income Transfer payments Market intervention taxes
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4-reallocation of resources Market failure Spillovers or externalities CAN BE A SPILLOVER COST OR SPILLOVER BENEFIT Spillover costs How 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 benefits How 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 system But would be underproduced
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5 th -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 Progressive Marginal 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
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