Lecture 23 Notes

Lecture 23 Notes - ECN 211 Macroeconomic Principles L23 Fiscal Policy(continued 1 Re-cap Changes in G had larger effects on real GDP than changes

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
11/2/09 1 ECN 211 Macroeconomic Principles L23: Fiscal Policy (continued)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Re-cap • Changes in G had larger effects on real GDP than changes in T (lump-sum taxation) – Due to k > t (in absolute terms) • What about if changes in G are matched with changes in T. – E.g. increased government spending is financed through increased taxation. 11/2/09 2
Background image of page 2
Balance budget changes T = G Original equations C = 100 +0.8Yd I=180 G= 100 X = 200 M= 100 +0.2Yd T= 200 Yd =(Y-T) Now suppose the government increases G by $100 while at the same time finances this by increasing T by $100 – remember the original Y* = $900. 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Solving for equilibrium Remember AE = C + I + G + X – M AE =100+0.8(Y- 300 )+180+(100+ 100 )+200-[100+0.2(Y- 300 )] AE =100+0.8Y- 240 +180+ 200 +200-100-0.2Y+ 60 AE =400+0.6Y In equilibrium AE=Y => 400+0.6Y =Y =400=0.4Y Y*=1000 4
Background image of page 4
Balanced budget multiplier Notice when the government increases spending by $100 and finances this by increasing taxation by $100 then Y* increases by $100 (went from $900 to $1000) Therefore the balanced budget multiplier is always equal to one 11/2/09 5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
• Have focused on lump-sum taxation previously. • Going to look at introducing a tax rate (v) • Investigate how income taxes affect the spending multiplier. • To make things simpler- going to assume a
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/03/2010 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

Page1 / 21

Lecture 23 Notes - ECN 211 Macroeconomic Principles L23 Fiscal Policy(continued 1 Re-cap Changes in G had larger effects on real GDP than changes

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online