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feb 25 - a Trickle Down Effect 1 Δ G = 1000 1000 = ΔY 2 b...

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1. I = S 2. Multiplier 3. ~Dis FP 4. Deficit 5. Critique Keynsian favor fiscal policy of monetary policy Investment equals Savings (I = S; showing equilibrium) I a = S a (actual investment always equals actual savings) Planned investment does not always equal planned savings C = a + bYd (consumption function) No G (No T), Autarky Then Y = C + I, I = S, Y = C + S Saving Function: S = -a + (1-b)Y b = MPC C, I, Y C+I a + I 0 C a 0 Y1&consumption Y Planned Savings Actual savings which is negative Savings and C+I equilibrium will not increase GDP and the firm will not increase inventory but it will remain the same From bottom up (C, C+I, C+I+G, C+I+G+Xn)
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C+I I 0 C a S I a Y1: Savings = 0 Y2: savings = I
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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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