11.05.08 - ECONOMICS 1 Professor Kenneth Train 11/5/08...

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ECONOMICS 1 Professor Kenneth Train 11/5/08 Lecture 20 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS Problem Set 4 due second section meeting the week of November 10 . LECTURE Good afternoon everybody! Today we’re going to continue our discussion on aggregate output and put government into the picture to see how that affects it. The basic story is pretty straightforward. The government does two things to affect aggregate output: it taxes and spends. Taxation Taxation takes money away from consumers, so it reduces consumption and shrinks the economy. If you lower taxes it tends to stimulate the economy. Spending Spending does the same as any kind of spending. It adds more demand for a product, so that increases total production. Total output in the economy increases when government spends. Fiscal Policy: Government Stimulating the Economy That describes the situation no matter what the purpose of taxation or spending is. Fiscal policy, though, is the explicit use of such tools to affect the aggregate output of the economy. For example, raising taxes can lower aggregate output if we’re starting to have too much inflation. Conversely, as we’ve seen, lowering taxes is a way to stimulate the economy. Increasing the spending of the government is another way to stimulate the economy. The use of fiscal policy to affect output is a relatively rare event because it’s so difficult to raise taxes. Not only do voters not like taxes, but it causes the economy to shrink and enter a recession. That’s one reason we have this continuing deficit. One interesting thing here is that it seems that government taxing and spending counteract each other; if you tax and spend 100 dollars it should be a neutral event in the economy. But it’s not. That’s an important thing to recognize.
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 11/5/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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11.05.08 - ECONOMICS 1 Professor Kenneth Train 11/5/08...

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