Injections and Withdrawals

Injections - add to main income spending stream in economy (I,G,X)Withdrawals - outward flows of funds. Divert funds from the income-spending stream (Savings, Taxes, M)

Investments and Savings

Most funds are borrowed by businesses for investments-

Companies keep a portion of their profits to reinvest-

Governments also borrow money - more government borrow, the less ends up with businesses-

Foreign flows-

Government purchases and taxes

Usually government purchase exceeds taxes-

To make up - governments borrow funds in financial markets-

Recent years - T >G, governments - use these excess funds to pay off some of their outstanding debts.-

Exports and Imports

Money spend on imports > exports-

Foreign lenders typically provided funds to Canadian financial markets, with lending by foreigners being greater than borrowing by foreigners

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This surplus of lending by foreigners has helped make up the shortfall in net exports-

Total Injections and Withdrawals

Total injections. I (I-Planned investments) + g + x-

Total withdrawals: S + T + M-

When total injections exceed total withdrawals, flows into the income-spending stream > flows out. This implies that real output and spending in the economy expand

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When total withdrawals exceed total injections, flows into the income-spending stream are less than outflows. The income-spending stream falls and slows down. This implies that real output and spending in the economy contract.

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Equilibrium : Total injections = total withdrawals -

Real GDP

Price Level (GDP DEFLATOR)

AS

AD

Potential Output

Recessionary Gap

Injections And WithdrawalsDecember-01-08

8:29 AM

Unit 3 - Fiscal Policy Page 1

Equilibrium VS Potential Output

Recessionary Gap - is the amount by which equilibrium output falls short of potential outputIf equilibrium output is below its potential level, unemployment is above the natural unemployment rate. (The difference between the equilibrium output and potential output is the RECESSIONARY GAP.

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Inflationary Gap- is the amount by which equilibrium output exceeds potential outputIf equilibrium output is above its potential output, unemployment is temporarily below the natural unemployment rate

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When equilibrium output > potential output - inflationary GAP-

AS

AD 1

AD2

AD3

Recessionary Gap

Inflation Gap

Equilibrium

REAL GDP

PRICE LEVEL

10.3 Practise Questions

Surplus, Inflation gap, economy expandsa.Recessionary gap, deficitb.

-1.

IGX, STMa.Yesb.

-2.

Belowa.Aboveb.Higherc.

-3.

Unit 3 - Fiscal Policy Page 2