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16
Public Finance: Expenditures and Taxes
McGrawHill/Irwin Copyright © 2012 by The McGrawHill Companies, Inc. All rights reserved.
Government and the Circular Flow
(1) Costs (1) Money income (rents, wages, interest, profits)
(2) Resources RESOURCE MARKET
(2) Land, labor, capital
Entrepreneurial ability
(7) Expenditures
(10)
Goods and services
BUSINESSES
Net taxes (11)
(8) Resources
(9)
Goods and services
GOVERNMENT HOUSEHOLDS
Net taxes (12)
(5) Expenditures (6) Goods and services
(4)
Goods and services
PRODUCT MARKET
(4)
Goods and services
(3) Revenues (3) Consumption expenditures
LO1 16-2
Government Finance
• Government purchases • Exhaustive
• Transfer payments • Nonexhaustive
• Borrowing and deficit spending • Opportunity cost is low during
recession; high during growth
LO1 16-3
Government Finance
Government purchases, transfers, and total spending as percentages of U.S. output
40
35
Government
30 transfer payments 15% 25 5%
20
15
10 22% Government 5 purchases
20%
0
Year
1960 2009
LO1 16-4
Federal Expenditures
LO1 16-5
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