Lecture 11

# Lecture 11 - Multiple choice ch 8 Chapter 9: Fiscal Policy...

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Macro Theory (Income) Y = C + I + G + (Ex – IM) Exogenous – outside of the model and is given Endogenous – what we are trying solve for Income is endogenous and everything else is exogenous C = a + bY d C - consumption a – autonomous C (intercept) b – MPC, marginal prepotency to consume Y d – disposable income ΔC = bΔY, b = ΔC/ΔY = expenditure rate (how much is spent from the disposable income) Absolute income hypothesis (Keynes) Relative income hypothesis Permanent income hypothesis Life Cycle hypothesis Y = C + S + T Income spent on consumption, savings, or taxes Keynsian consumption model Disposable income Y d = Y – T Lump sum tax C = a + bY d , S = Y d – C = -a + (1-b)Y d C = a + b(Y-T) Y = a + bY – bT + I + G + Ex – IM (1-b)Y = Y – bY = (a + I + G + Ex – IM) – bT Everything in the parenthesis is expenditure related

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Y = (1/(1-b))( a + I + G + Ex – IM)+ (-b/(1-b))T
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Unformatted text preview: Multiple choice ch 8 Chapter 9: Fiscal Policy (FP) Y = 200, Y* = 220 T = T + tY Y = (1/(1-b)) (a + I + G + Ex IM)+ (-b/(1-b))T What government can control to change GDP (G and T): Use government expenditure as policy instrument: By ceteris Paribus making everything else constant (0): Y = (1/(1-b)) G Example: b = 0.8, G = 20 We want to increase the GDP by 20 to meet the potential GDP 20 = (1/(1-0.8))G = 5 G G = 20/5 = \$4 increase Government expenditure by \$4 Use tax as policy instrument: By ceteris Paribus making everything else constant (0): Y = (1=-b/(1-b)) T +20 = (-4) T, T = 20/-4 = -5 = decrease \$5 in taxes to get +20 in GDP G = T Y = (1=-b/(1-b)) G+ (-b)/(1-b)) T = (1=-b/(1-b)) G+ (-b)/(1-b)) G Y = (1/(1-b)) + (-b)/(1-b))) G...
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## Lecture 11 - Multiple choice ch 8 Chapter 9: Fiscal Policy...

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