Expenditure Multiplier

# Expenditure Multiplier - Econ 4.3 Wednesday March 3 1999...

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Econ 4.3 Wednesday, March 3, 1999 Announcements: Homework #3 was returned in class today. Lecture notes: Expenditure Multiplier C = 500 + .8 x Y G = 50 , T = 0 , I = 40 See figure 10.3 on page 207 Y = C + I + G Y = 500 + .8Y + 50 + 40 Y = 500 + .8Y + 90 Y = 590 + .8Y = 590 / .2 =2950 Macroequilibrium Disturbance Suppose G increases by 10 Suppose T does not change WHAT WILL BE THE NEW LEVEL OF GDP? Neutral Fiscal Policy: GDP stays the same Expansionary Fiscal Policy: cut taxes and/or raise spending Contractionary Fiscal Policy: raise taxes and/or cut spending Government Spending Multiplier The ratio of the change in the equilbrium level of output to a change in

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Unformatted text preview: government spending • Government spending multiplier = 1 / MPS Tax Multiplier • The ratio of change in the equilibrium level of output to a change in taxes • Tax Multiplier = - (MPC / MPS) Balanced Budget Multiplier • The ratio of change in the equilibrium level of output to a change in government spending where the change in government spending is balanced by a change in taxes so as not to create any deficit. The balanced-budget multiplier is equal to one: the change in Y resulting from the change in G and the equal change in T is exactly the same size as the initial change in G or T itself. • Balanced Budget Multiplier = 1...
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