lec18 - Aggregate Output with Government Fiscal Policy...

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3 Aggregate Output with Government Taxation: Takes money away from consumers. Reduces consumption. Government spending: Government buys goods and services. Increases total expenditures. 7 Fiscal Policy Use of taxation and government spending to affect aggregate output. Higher taxes Lower aggregate output. Higher spending Higher aggregate output. 9 Recall, with no government: Planned expenditures: AE = C + I Consumption increases with Y. AE Y C + I Y* 12 Add government: G is government spending. T is total taxes. G - T is surplus or deficit. 14 Planned expenditures include government spending: AE = C + I + G Consumption drops as taxation rises. C depends on disposable income Y - T. C = 100 + .75 ( Y - T ) 15 Aggregate output with government: AE Y C + I + G Y*
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16 Taxation lowers consumption: AE Y C 1 + I C 2 + I 17 Government spending is added: AE Y C 1 + I C 2 + I C 2 + I + G 18 Aggregate output with government: AE Y C(T) + I + G Y* 19 Effect of increase in government spending: G rises Y rises.
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This note was uploaded on 10/09/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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lec18 - Aggregate Output with Government Fiscal Policy...

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