Let us now work through how contractionary fiscal policy functions

Let us now work through how contractionary fiscal policy functions

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Let us now work through how contractionary fiscal policy functions. Recall that raising  taxes and lowering government spending are both forms of contractionary fiscal policy.  When the government raises taxes, consumers are forced to put a larger portion of their  income toward taxes, and thus disposable income falls. In terms of the economy as a  whole, this is represented by Y = C(Y - T) + I + G + NX where an increase in T results in  a decrease in Y, holding all other variables fixed. When the government reduces  government spending, the recipients of government spending, the populace, have less  disposable income. In terms of the economy as whole, this is represented by Y = C(Y -  T) + I + G + NX where a decrease in G results in a decrease in Y. Contractionary fiscal  policy makes the populace less wealthy and decreases output, or national income. 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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Let us now work through how contractionary fiscal policy functions

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