Econ1102_Week6 - Week 6 Lectures 11 12 Fiscal Policy...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Week 6 Lectures 11 & 12 Fiscal Policy Reference: Bernanke, Olekalns and Frank - Chapter 8 Key Issues Fiscal policy and output gaps Effects of different fiscal instruments Limitations of fiscal policy Fiscal policy and demographics Public debt and government budget constraint
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 Fiscal Policy Components to fiscal policy: Government expenditure: current goods and services, investment and infrastructure Taxes (direct, indirect) – income taxes, consumption taxes Transfer payments – benefits, pensions Government decisions about these variables can affect the level of output in the economy Use the Keynesian model to show how changes in fiscal policy affect aggregate output
Background image of page 2
3 Government Spending and Output Gaps Government purchases of goods and services are a component of PAE NX G I C PAE P + + + = Government expenditure is (treated as) exogenous, so changes in G will shift the PAE line Model implies that changes in G can be used to close output gaps, i.e. to ensure * Y Y =
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 Increasing G to Eliminate a Negative (Contractionary) Output Gap Potential Output P A E 4 5 - d e g r e e l i n e * Y Y
Background image of page 4
5 Increasing G to Eliminate a Negative (contractionary) Output Gap Potential Output P A E 4 5 - d e g r e e l i n e 1 PAE e Y * Y Y Output gap < 0
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6 Increasing G to Eliminate a Negative (contractionary) Output Gap Potential Output P A E 4 5 - d e g r e e l i n e new PAE 1 PAE e Y * Y Y Output gap < 0
Background image of page 6
7 Taxes, Transfers and PAE Governments make decisions about the level and types of taxes and transfer payments made in the economy. Recall: Transfer payments are not part of G (since the government does not receive any goods and services in return). Taxes and transfers only have an indirect effect on PAE
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
8 Taxes, Transfer Payments and Disposable Income Taxes and transfer payments affect the level of disposable income ( Y – T ) received by the private sector. Tax cuts and increases in transfer payments will increase disposable income. When disposable income rises, PAE will rise. Tax increases and decreases in transfer payments will decrease disposable income. When disposable income decreases, PAE will decrease.
Background image of page 8
9 Equation for PAE in 4-Sector Model NX G I C PAE P + + + = Y t c T c C C ) 1 ( + = Y t m T m M ) 1 ( + = M X NX = ( Lots of substitution and collecting terms gives ) Y t m c X G I T m c C PAE P ) 1 )( ( ] ) ( [ + + + + = Government can change: the exogenous part of taxes and transfers T the tax rate t
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
10 Increasing the Tax Rate t to Eliminate a Positive (Expansionary) Output Gap Y t m c X G I T m c C PAE P ) 1 )( ( ] ) ( [ + + + + = The slope of the PAE curve is given by ) 1 )( ( t m c and depends on t. What is the effect of an increase in t ? Let
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 53

Econ1102_Week6 - Week 6 Lectures 11 12 Fiscal Policy...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online