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Unformatted text preview: a Trickle Down Effect 1. Δ G = 1000, 1000 = ΔY 2. b = 0.8, $800 = bΔY = bΔG = IΔC 3. Δ C = b ( b Δ G) bΔY = b^2 ΔG = 640 = bΔY = b^2ΔG 4. ΔG = bΔY = b^3ΔG Because b keeps increasing, Δ Y = (1+b+b^2+b^3…)ΔG => A = 1/(1-b) b = 0.8, EM = 5, TM = -4 nondiscretionary fiscal policy Our economy has a built-in stabilizer (unemployment insurance, food stamps, etc) This drags down the economy Budget Deficit was high during Reagan administration Deficit vs Debt Deficit is the flow and Debt is the stock Bathtub example: faucet flows water in and then drains out, water is stock piled in the tub...
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