MacroEcon Lecture Fiscal Policy

MacroEcon Lecture Fiscal Policy - November 15, 2011 Two...

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November 15, 2011 Two types of Fiscal policy Recession type: Consumption may be low Expansionary Fiscal Policy (expand the economy) G increases, T decreases Government can do this by lowering taxes G purhcases Demand- pull inflation- Confractionary F.P (Fiscal Policy) Opposite of the recession type Operates close to PPF Taxes have to increase a bit G decreases, T increases ** Cost Pull inflation: there’s nothing we can do about it solution: foreign policy Expansionary F.P More effective if government uses G more than T MPC=. 6 – M= (1/.4)= 2.5 Say G increases by $400 billion -> G x< (400x 2.5) -> GDP increases by 1 trillion Say T decreases, $400 billion -> DI increases by 4 billion -> C increases by 240 billion (400 x 60%)> C xM -> GDP increases by $600 Tax cut is less than government purchases Follow tax multiplier= -MOC x regular multiplier = (-.6 x 2.5)= 1.5 Change in GDP= GDP= tax multiplier x change in taxes -> 1000 billion = 1.5 x X= X- 1000/-1.5 = $666 _____ with fiscal policy: 1. administrative lag
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MacroEcon Lecture Fiscal Policy - November 15, 2011 Two...

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