Lecture5 - Lecture 5: Fiscal Policy In this lecture, we...

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ECON1002 Introductory Macroeconomics 1 Lecture 5: Fiscal Policy In this lecture, we will study Fiscal policy as a tool of stabilisation How taxes and spending affect the economy Fiscal policy and income distribution Demographic changes and fiscal policy Limitations of fiscal policy Fiscal policy and government debt Measuring the stance of fiscal policy
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ECON1002 Introductory Macroeconomics 2 Expected Learning Outcomes You should be able to answer the following questions: How can fiscal policy be used a policy tool of economic stabilisation? How would tax cuts (rises) and government expenditures have different impacts on the economy? Why? How effective is fiscal policy in stabilising the economy? What are the limitations? How does fiscal policy affect the distribution of income? What consequences would demographic changes bring about in conducting fiscal policy? What determines the level of public debt? How do we correctly measure the actual stance of fiscal policy?
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ECON1002 Introductory Macroeconomics 3 Y PAE Y Fiscal Policy for Stabilisation 45 0 PAE 0 Y 0 Y* 1. An increase in G
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ECON1002 Introductory Macroeconomics 4 p PAE I M X C G = + + + - ( ) [ ( )] (1 ) = + - = + + - - C C c Y C c Y T T t Y 600, 0.85, 100, 200, 50, 0, 0.0476, 0.01 p C c I G X T t m = = = = = = = = 950 0.8 PAE Y = + Effect of Tax Cuts (1 ) - = m M t Y ( ) ( )(1 ) p PAE C cT I G X c m t Y = - + + + + - - Assuming the following values initially,
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ECON1002 Introductory Macroeconomics 5 600, 0.85, 100, 200, 50, 0 ' 0.0451 , , 0.01 p C c I G X T m t = = = = = = = = 950 0.802 PAE Y = + Effect of Tax Cuts ( ) ( )(1 ) p PAE C cT I G X c m t Y = - + + + + - - Now consider an income tax cut ( t ↓ ) A tax cut changes the slope of PAE!
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ECON1002 Introductory Macroeconomics 6 Y PAE Y Fiscal Policy for Stabilisation 45 0 PAE 0 4750 4800 2. A Tax cut
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Lecture5 - Lecture 5: Fiscal Policy In this lecture, we...

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