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Unformatted text preview: Let us first work through how expansionary fiscal policy functions. Recall that lowering taxes and raising government spending are both forms of expansionary fiscal policy. When the government lowers taxes, consumers have more disposable income. In terms of the economy as a whole, this is represented in the output equation Y = C(Y - T) + I + G + NX, where a decrease in T, given a stable Y, leads to an increase in C, and ultimately to an increase in Y. Raising government spending has similar effects. When the government spends more on goods and services, the population, which provides those goods and services, receives more money. In terms of the economy as a whole, this is again represented by Y = C(Y - T) + I + G + NX, where an increase in G leads to an increase in Y. Thus, expansionary fiscal policy makes the populace wealthier and an increase in Y....
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- Fall '10
- Fiscal Policy