This chapter explains the role of government budgets in a mixed economy, focusing on revenue sources, expenditure functions, and their significance in economic stability.
Government Budget And The Economy – Formula & Equation Sheet
Essential formulas and equations from Introductory Macroeconomics, tailored for Class 12 in Economics.
This one-pager compiles key formulas and equations from the Government Budget And The Economy chapter of Introductory Macroeconomics. Ideal for exam prep, quick reference, and solving time-bound numerical problems accurately.
Key concepts & formulas
Essential formulas, key terms, and important concepts for quick reference and revision.
Formulas
Revenue Deficit = Revenue Expenditure - Revenue Receipts
This equation shows the excess of government's revenue expenditure over revenue receipts, indicating the amount the government is dissaving.
Fiscal Deficit = Total Expenditure - (Revenue Receipts + Non-debt Creating Capital Receipts)
It captures the total borrowing requirements of the government, highlighting its overall fiscal health.
Gross Fiscal Deficit = Net Borrowing at Home + Borrowing from RBI + Borrowing from Abroad
This formula breaks down how the fiscal deficit is financed through various sources.
Primary Deficit = Fiscal Deficit - Net Interest Liabilities
This focuses on the fiscal imbalance without considering interest payments, showing the government's reliance on new borrowing.
Balanced Budget Multiplier = 1
Indicates that an equal increase in government spending and taxes results in a proportional increase in overall income.
Government Spending Multiplier = 1 / (1 - c)
This shows the impact of government spending on income, where c is the marginal propensity to consume.
Tax Multiplier = -c / (1 - c)
Describes the impact of a change in taxes on overall income, highlighting the negative relationship with the marginal propensity to consume.
Aggregate Demand = C + I + G + (X - M)
This equation illustrates the total demand in the economy, where C is consumption, I is investment, G is government spending, X is exports, and M is imports.
Consumption Function: C = C₀ + c * YD
This defines consumption as a function of disposable income (YD), where C₀ is autonomous consumption and c is the marginal propensity to consume.
Revenue Receipts = Tax Revenues + Non-Tax Revenues
Shows the components of revenue receipts that contribute to the government's income.
Equations
Revenue Deficit = Revenue Expenditure - Revenue Receipts
Measures the government's inability to finance its revenue expenditure through revenue receipts.
Fiscal Deficit = Total Expenditure - (Revenue Receipts + Non-debt Creating Capital Receipts)
Indicates the total borrowing needs of the government over a specific period.
Primary Deficit = Fiscal Deficit - Interest Payments
Helps assess the underlying fiscal position of the government by excluding past borrowing costs.
Y* = 1 / (1 - c) (C + I + G)
Describes equilibrium income, where an increase in G impacts Y due to the multiplier effect.
A = C + (1 - t)Y + I + G
Defines autonomous aggregate demand accounting for consumption, taxes, investments, and government expenditure.
G = tY
Expresses government taxation as a constant fraction of national income (Y), where t is the tax rate.
YD = Y - T
Defines disposable income as total income minus personal taxes.
dY / dG = 1 / (1 - c)
Shows the effect of government spending changes on national income using the government spending multiplier.
Change in Y = c * Change in T
Represents how changes in taxes affect overall income through consumption adjustments.
C = C₀ + c(Y - T + TR)
Indicates consumption as a function of disposable income after accounting for taxes and transfers.
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