ECON102_SCHULZE_5 - #5 The Government and Fiscal Policy...

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#5 13/03/2007 20:38:00 The Government and Fiscal Policy Fiscal Policy The government’s spending and taxing policies Monetary Policy The behavior of the Federal Reserve concerning the nation’s money supply Government in the Economy Discretionary Fiscal Policy Changes in the taxes or spending that are the result of deliberate changes in  government policy Net Taxes (T) Taxes paid by firms and households to the government minus transfer  payments made to households by the government Disposable or After-Tax Income (Y d ) Total income minus net taxes:  Y – T When government enters the picture, the aggregate income identity gets cut into  three pieces:
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Y d  = Y –T Y d  = C + S Y – T = C + S Y = C + S + T And aggregate expenditures equals: AE = C + I + G Budget Deficit The difference between what a government spends and what it collects in  taxes in a given period:   G – T Adding Taxes to the Consumption Function: To modify our aggregate consumption function to incorporate disposable  income instead of before-tax income, instead of  C = a +bY, we write C = a +bY d or C = a + b (Y – T) Our consumption function now has consumption depending on disposable  income instead of before – tax income.
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Investment The government can affect investment behavior through its tax treatmnt of  depreciation and other tax policies Equilibrium Condition Y = C + I + G Fiscal Policy at Work: Multiplier Effects
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ECON102_SCHULZE_5 - #5 The Government and Fiscal Policy...

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