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# Lecture_5_complete_version - Lecture 5 Fiscal Policy Money...

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1 Lecture 5 Fiscal Policy Money, Prices and the RBA

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2 Fiscal Policy Fiscal policy consists of: Government spending Taxes and transfer payments Keynes: G is the most effective tool Great Depression (1930s) Great Recession (2010)? Are G and C perfect substitutes? But what about T?
3 Fiscal Policy via G or T Period 1 c = 0.6, t = 0.2, m = 0.05. Period 2 (option G ↑G) c = 0.6, t = 0.2, m = 0.05. Period 2 (option T t ) c = 0.6, t = ??, m = 0.05. 400, 900, 200, 300, 0 C I G X T = = = = = 500, 1000, 200, 400, 0 C I G X T = = = = = 400, 900, 200, 300, 0 C I G X T = = = = =

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4 Using G to Close An Output Gap PAE Y 45° PAE 0 = 2100 + 0.44Y PAE 1 = 1800 + 0.44Y Contractionary Gap 3750 3214 4-sector model
5 Using T to Close An Output Gap PAE Y 45° Contractionary Gap 3750 3214 4-sector model PAE 0 = 2100 + 0.44Y PAE 1 = 1800 + 0.44Y PAE 2 = 1800 + 0.52Y ( 29 1800 3750 1 0.55 1 0.0545 t t = - - ⇒ =

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6 When respond to ↓PAE with G: Must ↑G by 300 When respond to ↓PAE with T: Must ↓ t from 20% to 5.45% In both cases get back to Y=3750 But which approach is more realistic?
7 Macro Impact of the Baby Bonus? \$5000 to parents of a new baby an exogenous tax cut. What happens to PAE?

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## This note was uploaded on 12/14/2010 for the course ECON 1002 taught by Professor Markmelatos during the Three '10 term at University of Sydney.

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Lecture_5_complete_version - Lecture 5 Fiscal Policy Money...

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