Section 6 - Fiscal Policy and Monetary Policy Government...

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Fiscal Policy and Monetary Policy
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Government does three main things (1) Tax (2) Spend (3) Redistribute Wealth → We need to tweak our model to consider how changes in the first two affect the economy → This is called Fiscal Policy Changes in government spending and taxes Fiscal Policy
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How do we pay for government spending? (1) Raise revenue through taxes (2) Borrow money through bond issues
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Problem with bonds: We have to pay interest This means that national debt continues to increase even if we have a balanced budget because we have to pay interest from previously issued bonds → Federal debt continues to grow → Sometimes called “debt service” → Interest is growing part of yearly government spending
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U.S. NATIONAL DEBT CLOCK The Outstanding Public Debt as of 27 Apr 2006 at 02:48:12 PM GMT is: The estimated population of the United States is 298,598,265 each citizen's share of this debt is $28,010.15 . The National Debt has continued to increase an average of $2.06 billion per day since September 30, 2005!
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Interest Expense on the Debt Outstanding Available Historical Data FISCAL Year End 2005 $352,350,252,507.90 2004 $321,566,323,971.29 * Source: Bureau of the Public Debt 2003 $318,148,529,151.51 US Department of the Treasury 2002 $332,536,958,599.42 2001 $359,507,635,242.41 2000 $361,997,734,302.36 1999 $353,511,471,722.87 1998 $363,823,722,920.26 1997 $355,795,834,214.66 1996 $343,955,076,695.15 1995 $332,413,555,030.62 1994 $296,277,764,246.26 1993 $292,502,219,484.25 1992 $292,361,073,070.74 1991 $286,021,921,181.04 1990 $264,852,544,615.90 1989 $240,863,231,535.71 1988 $214,145,028,847.73
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Suppose government wants to increase spending without causing a deficit → Can require that all spending be paid for by tax revenue (i.e. require balanced budget) Balanced Budget Multiplier → Balanced Budget → In terms of increasing spending, to maintain a balanced budget we need G = T ∆G = ∆T
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What is the effect of an increase in G? What is the effect of an increase in T? If we increase both G and T then the effects will be If we have a balanced budget requirement, ∆G = ∆T ( 29 ΔG b 1 1 ΔG ΔY - = ( 29 ΔT b 1 b - ΔT ΔY - = ( 29 ( 29 ΔT b 1 b - ΔG b 1 1 ΔY - + - = ( 29 ( 29 ( 29 ( 29 ΔG (1) ΔG b 1 b 1 ΔG b 1 b - ΔG b 1 1 ΔY = - - = - + - = Balanced Budget Multiplier
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Back to our example a = 150 b = .75 T = 40 I = 75 G = 75 ( 29 1080 270 4 270 .75 1 1 Y* = = - = 4 .75 1 1 b 1 1 Multiplier e Expenditur Government = - = - 3 - .75 1 .75 - b 1 b - Multiplier Tax Sum - Lump = - = - 1 75 . 1 75 .
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Section 6 - Fiscal Policy and Monetary Policy Government...

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