The Government and Fiscal Policy

The Government and Fiscal Policy - Econ 4.3 Monday March 1...

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Econ 4.3 Monday, March 1, 1999 Announcements: Test Grades were sent via email Lecture notes: Fiscal Policy: the use of the government budget on both the revenue and expenditure side to influence the economy Chapter 10: The Government and Fiscal Policy Government in the Economy Fiscal Authority: congress and the president and state and local officials Responsibilities : o Set Purchasing Levels (G) o Set Taxes (T) We'll assume that G and T are set on constant levels Disposable Income Net Taxes: taxes minus transfers Disposable Income: income minus taxes Y d =Y - T Disposable Income = Income - Taxes Aggregate Expenditures with Government Y d = Y - T Y d = C + S Y - T = C + S Y = C + S + T AE = C + I + G The Model Economy I (1) C = 500 + 0.75 x (Income - Taxes) = 500 + 0.75 x Y d (2) I = 50 (3) G = 100
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(4) T = 60 The Model Economy II (5) AE = C + I + G (5a) AE = 500 +0.75 (Y-60) + 50 + 100 (5b) AE = 650 + 0.75 (Y-60) (6) AE = Y | Equilibrium
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Unformatted text preview: • (6a) Y = 650 + 0.75Y - 45 • (6b) Y - 0.75Y = 605 • (6c) 0.25Y = 605 • (6d) Y = 605 / 0.25 = 2420 = AE The Model Economy III • (7a) C = 500 +0.75 (2420 - 60) = 2270 • (7b) S = Y - C - T • (8) S + T = 90 + 60 = 150 • (9) I + G = 50 + 100 = 150 • (10) S + T = I + G | Equilibrium • (10a) leakages = injections • (10b) withdrawals = injections • (10c) W = J | Equilibrium Condition See figure 10.2 on page 204 in the textbook • 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 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....
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