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CH 11 Fiscal Policy and The Federal Budget
CH 11 Fiscal Policy and The Federal Budget
Federal Budget
Ch. 10, Macroeconomics, Roger A Arnold
The Government
Remember the domestic economy can be
divided into three sectors:
1. Households 2. Business Firms 3. Government
In this chapter we study the role of the Government.
Like households and business firms, the government
also earns and spends. The spending of government
is called government expenditures. Government
expenditures are the sum of government purchases
and government transfer payments.
Government expenditures = government purchases + transfer payments
Government Expenditures
Government purchases are goods and services bought
by the government (E.g., cements, rods, steel for
building roads and highways).
Government purchases are payments that are not
made in return for goods and services (E.g., subsidies
/ cash given to farmers. The government does not
receive anything in return from the farmers).
In 2019, Bangladesh government spent around
3,813,723 million taka, which was around 15% of the
GDP of 2019. That’s a lot of money!
Government Tax Revenues
How does the government earn the money it spends?
The main source of income of the government is tax
revenues, which the government earns by taxing
households and business firms. There are mainly
three types of tax systems:
1. Progressive income tax: System in which one’s tax
rate rises as taxable income rises
2. Proportional income tax: System in which tax rate is
the same regardless of taxable income
3. Regressive income tax: System in which a person’s tax
rate declines as his her taxable income rises
Continued
Bangladesh Government implements the
following progressive tax system.
The Government Budget
Government Budget: A plan for the federal government’s tax
revenues and expenditures for the coming year.
PS. This along with the crowding out are reasons why fiscal policy
might not be effective
11-4 Supply Side Fiscal Policy
Marginal Tax Rates and Aggregate Supply
Marginal Tax Rate: The change in a person’s tax
payment divided by the change in taxable
income: