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Lecture 22 Notes

Lecture 22 Notes - ECN 211 Macroeconomic Principles L22...

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10/30/09 1 ECN 211 Macroeconomic Principles L22: Fiscal Policy
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10/30/09 2 Fiscal Policy What is fiscal policy? A tool that allows the government to guide the economy along an expansionary (real GDP increasing ) or contractionary (real GDP falling ) path. It involves manipulating government spending (G) and taxation (T) Initially going to assume that all taxation is lump-sum taxation. i.e. does not very with income .
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10/30/09 3 Recap: Eliminating a GDP Gap GDP Gap = potential real GDP – actual real GDP Recessionary Gap = GDP gap/ “Multiplier” Government needs to increase aggregate expenditures and uses the multiplier to boost GDP What are the options available to the government using fiscal policy to boost aggregate expenditures?
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Fiscal policy and AE How can the government increase AE? Reduce Taxes which boosts Combustion Increase Government Spending (autonomous expenditure) Question do they have the same effect on AE??
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