- •Consumption function
- •But in our analysis we shall include Government and Foreign components (g;t;m;X)
- •Withdrawals and Injections
- •1) Withdrawals function
- •2) Injections and their determinants
- •Determination of National Income
- •Factors of δ ,Conditions of Equilibrium
- •2) Multiplier Effect
- •2 Main practical conclusions from mult. Theory:
- •Keynesian analysis of the inflation & trade cycles
- •1. Inflation
- •2. Keynes explained business fluctuations by instability of investment
- •3. Mechanism of the Trade cycles
- •1. Terminology
- •2. Budget philosophies & growing national debt
- •1. Does national debt figures reflect the real burden for a country?
- •2. Can growing national debt leave to gnt bankruptcy?
- •Fiscal policy
- •1. Automatic/”built-in” stabilizers
- •Stabilizing effect of gnt transfer payments
- •2. Discretionary fiscal policy
- •3. Effectiveness of fiscal policy
2. Budget philosophies & growing national debt
There are historically some concepts of gnt budget.
Annually balanced budget (old fashioned public finance). Budget must be balanced annually. Disadvantages of this concept:
Impossible to influence AD, as gnt exp-res are limited by receipts (revenues)
It may deepen business fluctuations (if now economy is in recession, personal income ¯, taxes ¯ ® to balance budget in this case gnt should T and ¯ gnt exp-re®the recession will develop ()
It may accelerate inflation (assume rate of inflation nominal incomes , nominal tax revenues ® to balance budget gnt should ¯T and Gnt exp-res®further inflation (new step; demand-pull ifl)
Cyclically balanced budget. Budget must be balanced according to business cycles. To smooth out recession there must be budget deficit (G, ¯T ® this helps to smooth out recession). To decrease inflation in the boom period there must be budget surplus (¯G, T). The result is balanced budget over 1 cycle. The main disadvantage: the magnitude and duration of cycles may differ and we may have f.e. very large deficit in recession period and very small surplus in boom period ® increasing budget deficit (not balanced budget)
Functional finance. The problem of a balanced budget is not important (get rid of inflation, unemployment are more important than balanced budget). Main disadvantage is the growing national debt. National/public/gnt debt is an accumulated budget deficit over years. NatDebt=internal debt(debt to its own citizens) + external debt(debt to foreign countries)
Modern public finance. Economists try to analyse causes of budget debt and try to determine possible effects of deficit in the economy. Actual (real) budget= Structural budget (level at which gnt revenues and exp-res should be if output were at its full-employment level) + cyclical budget (real budget – ideal budget)
Causes of gnt debt:
Natural disasters, wars, social conflicts. These events require in gnt tax ® tax=const ® national debt
Recession. People receive low income ® tax contribution¯ in gov exp to stop recession
Wrong budget policy. Chronic access of gnt expenditure over tax revenues. When gnt year from year increase GE, don’t correspond with tax revenues.
DEBATES AMOUNG ECONOMISTS:
1. Does national debt figures reflect the real burden for a country?
- NO. Reasons:
*Growing debt may be accompanied by positive economic growth (if NB with the in GNP – no problem with debt)
*Budget deficit & national debt may be overstated by inflation (due to in interest on it, but not to debt itself)
*National debt may increase due to increase in internal debt (-debt to ourselves; not real burden for economy) (not external)
*Gnt investment (spending for buildings, national debt, but it is real assets and this investment (spending for buildings, roads, etc.) is counted as GE. These GE increase national debt. But it is real assets and they increase the wealth of the country.