3Aggregate Output with GovernmentTaxation:Takes money away from consumers. Reduces consumption.Government spending:Government buys goods and services. Increases total expenditures.7Fiscal PolicyUse of taxation and government spending to affect aggregate output.Higher taxesLower aggregate output.Higher spendingHigher aggregate output.9Recall, with no government:Planned expenditures: AE = C + IConsumption increases with Y.AEYC + IY*12Add government:G is government spending.T is total taxes.G - T is surplus or deficit.14Planned expenditures include government spending:AE = C + I + GConsumption drops as taxation rises.C depends on disposable income Y - T.C = 100 + .75 ( Y - T )15Aggregate output with government:AEYC + I + GY*
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