Three-sector_model.ppt - Simple Keynesian Model National...

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1 Simple Keynesian Model National Income Determination Three-Sector National Income Model
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2 Outline Three-Sector Model Tax Function T = f (Y) Consumption Function C = f (Yd) Government Expenditure Function G=f(Y) Aggregate Expenditure Function E = f(Y) Output-Expenditure Approach: Equilibriu m National Income Ye
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3 Outline Factors affecting Ye Expenditure Multipliers k E Tax Multipliers k T Balanced-Budget Multipliers k B Injection-Withdrawal Approach: Equilibrium National Income Ye
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4 Outline Fiscal Policy (v.s. Monetary Policy) Recessionary Gap Yf - Ye Inflationary Gap Ye - Yf Financing the Government Budget Automatic Built-in Stabilizers
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5 Three-Sector Model With the introduction of the government sector (i.e. together with households C , firms I ), aggregate expenditure E consists of one more component, government expenditure G . E = C + I + G Still, the equilibrium condition is Planned Y = Planned E
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6 Three-Sector Model Consumption function is positively related to disposable income Yd [slide 37 of 2-sector model], C = f(Yd) C= C’ C= cYd C= C’ + cYd
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7 Three-Sector Model National Income Personal Income Disposable Personal Income w/ direct income tax Ta and transfer payment Tr Yd Y Yd = Y - Ta + Tr
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8 Three-Sector Model Transfer payment Tr can be treated as negative tax, T is defined as direct income tax Ta net of transfer payment Tr T = Ta - Tr Yd = Y - (Ta - Tr) Yd = Y - T
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9 Three-Sector Model The assumptions for the 2-sector Keynesian model are still valid for this 3-sector model [slide 24-25 of 2-sector model]
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10 Tax Function T = f(Y) T = T’ T = tY T = T’ + tY
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11 Tax Function T = T’ Y-intercept=T’ slope of tangent=0 T = tY Y-intercept=0 slope of tangent=t T = T’ +tY Y-intercept=T’ slope of tangent=
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12 Tax Function Autonomous Tax T’ this is a lump-sum tax which is independent of income level Y Proportional Income Tax tY marginal tax rate t is a constant Progressive Income Tax tY marginal tax rate t increases Regressive Income Tax tY marginal tax rate t decreases
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13 Consumption Function C = f(Yd) C = C’ C = C’ C = cYd C = c(Y - T ) C = C’ + cYd C = C’ + c(Y - T )
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14 Consumption Function C = C’ + c(Y - T ) T = T’ C = C’ + c(Y - T’ ) C = C’- cT’ + cY slope of tangent = c T = tY C = C’ + c(Y - tY ) C = C’ + (c - ct)Y slope of tangent = c - ct T = T’ + tY C = C’+c[Y- (T’+tY) ] C = C’ - cT’ + (c - ct) Y slope of tangent = c - ct
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15 Consumption Function C = C’ + c (Y - T’) Y-intercept = C’ - cT’ slope of tangent = c = MPC slope of ray APC when Y
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16 Consumption Function C = C’ + c (Y - tY) Y-intercept = C’ slope of tangent = c - ct = MPC (1-t) slope of ray APC when Y
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17 Consumption Function C = C’ + c [Y - (T’ + tY)] Y-intercept = C’ -cT’ slope of tangent = c - ct = MPC (1-t) slope of ray APC when Y
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18 Consumption Function C = C’ - c T’ + (c - c t )Y C’ OR T’ y-intercept C’ - c T’ C shift upward t c (1-t) C flatter c c (1-t)   C steeper y-intercept C’ - c T’   C shift downward
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