lec19 - 1 1 - MPC Example: C = 100 + 0.75 ( Y - T ) MPC =...

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3 Aggregate Output with Government Taxation: Takes money away from consumers. Reduces consumption. Government spending: Government buys goods and services. Increases total expenditures. 7 Fiscal Policy Use of taxation and government spending to affect aggregate output. Higher taxes Lower aggregate output. Higher spending Higher aggregate output. 9 Recall, with no government: Planned expenditures: AE = C + I Consumption increases with Y. AE Y C + I Y* 12 Add government: G is government spending. T is total taxes. G - T is surplus or deficit. 14 Planned expenditures include government spending: AE = C + I + G Consumption drops as taxation rises. C depends on disposable income Y - T. C = 100 + .75 ( Y - T ) 15 Aggregate output with government: AE Y C + I + G Y*

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16 Taxation lowers consumption: AE Y C 1 + I C 2 + I 17 Government spending is added: AE Y C 1 + I C 2 + I C 2 + I + G 23 Note: Y rises by MORE than G rises. A \$1 increase in G produces MORE than \$1 increase in Y. Government spending multiplier:
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Unformatted text preview: 1 1 - MPC Example: C = 100 + 0.75 ( Y - T ) MPC = 0.75 G Multiplier = 4 25 Suppose: Equilibrium output is 1000. Full employment output is 1200. Multiplier is 4. Full employment output can be attained by increasing government spending by 50. 31 Taxation multiplier: = -MPC x ( G Multiplier) = -MPC x 1 1 - MPC = - MPC 1 - MPC 32 Example: C = 100 + 0.75 ( Y - T ) MPC = 0.75 T multiplier = - 0.75 / 0.25 = - 3. If raise taxes by \$1, income falls by \$3. 33 What happens if we increase G and T together? G and T rise by same amount Y rises 36 Balanced budget multiplier: G Multiplier + T Multiplier = 1 M P C 1- MPC 1- MPC = 1 - MPC = 1 1 - MPC Example: If raise G by 10 and T by 10, Y increases by 10. 38 Suppose: Equilibrium output is 1000. Full employment is 1200. Can attain full employment output without increasing deficit by raising G and T by 200....
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lec19 - 1 1 - MPC Example: C = 100 + 0.75 ( Y - T ) MPC =...

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