ECN 211 L14 Fiscal Policy_BB

# ECN 211 L14 Fiscal Policy_BB - ECN 211 Macroeconomic...

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05/13/09 1 ECN 211 Macroeconomic Principles L14:  Fiscal Policy

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05/13/09 2 Fiscal Policy What is fiscal policy? A tool that allows the government to guide the economy along an expansionary (real GDP ________) or contractionary (real GDP ________) path. It involves manipulating government spending (G) and taxation (T) Initially going to assume that all taxation is ____________taxation. i.e. does not vary with income. Makes things simpler.
05/13/09 3 Recap: Eliminating a GDP Gap GDP Gap = Recessionary Gap = 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 alter AE? ________ Taxes which boosts Consumption ___________ Government Spending (autonomous expenditure) Question do they have the _________________ What happens if the government ___________________ i.e. finances an _________ in government expenditure by_____________taxes? 4
Back to the Keynesian aggregate expenditure model Assume the following; C = 100 +0.8Yd I=180 G= 100 X = 200 M= 100 +0.2Yd T= 200 05/13/09 5

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Solving for equilibrium Remember AE = C + I + G + X – M AE = AE = AE = In equilibrium AE=Y => = Y = Y*= Note at the moment the government is running a _____________________ of \$100 (G-T =\$100) 6
Suppose the Government increases G by \$50. AE = AE = AE = In equilibrium AE=Y => = Y = Y Y*= Again notice Y* increased by___________________ 05/13/09 7

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Recap: autonomous Spending multiplier. G increased by \$50. However Y* went from ________which is an increase of ______ Therefore k = change in Y/change in autonomous expenditure k= OR k = 1/ (MPS + MPI) k = 05/13/09 8
Rather than increasing G by \$50 what happens if T is reduced by \$50? AE = AE = AE = In equilibrium AE=Y => = Y Y*= 05/13/09 9

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Lump-Sum tax Multiplier T decreased by \$50. However Y* went from ________________which is an increase of _______ So t = change in Y/change in taxation t = t = Notice the multiplier is a ________ number because a tax cut causes real GDP to___________ A tax hike
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