AEM_ECON_2300_Lecture_20___Spring_2009

AEM_ECON_2300_Lecture_20___Spring_2009 - Lecture 20...

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Lecture 20 1 of Professor David Lee AEM-ECON 2300 “Spending multipliers” — measure total response of national income to policy stimulus Define: m = marginal propensity to import (“leakage”) = s = marginal propensity to save (“leakage”) = Change in imports (at margin) Change in real national income Change in savings (at margin) Change in real national income
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Lecture 20 2 of Professor David Lee AEM-ECON 2300 In a small open economy, income change stimulated by fiscal policy stimulus (∆G) is: ∆Y = ∆G + (1 - m - s) ∆Y % of income change returned to domestic economy (in short run) Define spending multiplier for small open economy: Y G = 1 ( m + s )
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Lecture 20 3 of Professor David Lee AEM-ECON 2300 Example: If m = 0.3, s = 0.2, then (1- m - s) = 0.5 Given initial fiscal stimulus = 100, first round effect = (1- m - s)(100) = 50 second round = (1- m - s)(50) = 25 etc. Overall income change , or a (100 x 2 =) 200 change in total income 2 ) ( 1 = + s m
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Lecture 20 4 of Professor David Lee AEM-ECON 2300 A country (esp. large country) may also experience increased
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This note was uploaded on 04/28/2009 for the course AEM 2300 taught by Professor Lee,d.r. during the Fall '06 term at Cornell University (Engineering School).

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AEM_ECON_2300_Lecture_20___Spring_2009 - Lecture 20...

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