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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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 Fall '11
 KITSIKOPOULOS
 Economics, Fiscal Policy, Inflation

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