3. Mechanism of the Trade cycles

is represented in multiplier & accelerator interactions

Initial ­ in Y is const

Initial ­ in J (­ G)



Multiplied ­in Y ®ΔY=k*ΔJ



Accelerator ­ in I



Multiplied ­ in Y



If ­ Y_t-1 > Y_t



Accelerator ¯ I



Multiplier ¯Y

The floor of recession is the minimum level of consumption.

According to Keynes the main goals of gnt policy are:

• To overcome recession due to increase in gnt ex-res in order to cause the multiplier rise in Y

• To curb boom (to decrease Ct) – the more rate of growth during the boom, the deeper may be fall during recession

Government Finance & Public Debt

1. Gnt finance/ terminology

2. Budget philosophies & growing national debt

3. Debates over gnt debt

1. Terminology

Gnt budget – statement showing gnt planned expenditures (or outlays) and revenues (or receipts) for one year.

C(consolidated or total) budget=Central gnt budget + local budget

Typical structure of gnt budget

Sources of revenues	Direction of expenditures
Individual income taxes (personal taxes) Social insurance taxes & contributions paid by workers and firms Corporate income taxes (business taxes) Other taxes (assize t, estate t, give t, customs duties, miscellaneous receipts) The largest component- individual income tax	National defense (military needs, police) Entitlements & other monetary spendings (social securities, social programs…) Discretionary spendings spending of gov-t on ec problems (farmers support, children support, space programs) Net interest = interest paid by gnt (revenues)- interest paid to gnt(expen). Gnt can keep foreign bonds & bills & in this case gov-t is like a creditor (not debitor)

Gnt budget may be:1) balanced (total exp-re=total revenue) 2) deficit (the excess of gnt exp-s over gnt receipts:GE>GR);3) proficit/in surplus (GE<GR).

• Annual deficit of public sector: (central gnt, local gnt, public corporations) - public sector borrowing requirements PSBR (amount that pub sector must borrow).

2 ways to finance deficit: 1) to issue money (result:inflation); 2) domestic and/or overseas borrowing (direct borrowing (from Central banks), indirect (from individuals by issuing bonds & bills)

• The annual surplus = public sector debt repayments PSDR (amount of debt that can be repaid). Main ways to dispose budget surplus: 1) debt repayments (gnt repay previous debt) and 2) impounding/idle surplus ( not use of surplus at all) – used when there is a high level of inflation.