ECO3041 - Ch 12 Fiscal Policy

ECO3041 - Ch 12 Fiscal Policy - Department of Economics,...

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Department of Economics, FIU Chapter 12 Notes Prof. Dacal
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Chapter 12 Notes Chapter 12 Fiscal Policy I. Components of Aggregate Demand Fiscal policy is the use of government taxes and spending to alter macroeconomic outcomes. Aggregate demand is the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus. Recessions occur when: The aggregate demand declines – and is negative for two consecutive quarters. The AD remains below the economy’s capacity to produce or potential GDP. The four major components of aggregate demand are Consumption Investment Government spending Net exports Consumption Consumption refers to all household expenditures on goods Consumption function is: ( 29 τ + - t Y C Where, Y = income, t = taxes, and τ = income transfers Because of the proportion of consumption to AD (70 percent of AD), any change in consumer behavior will have an impact on employment and prices though the goods markets. 2 | P a g e
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Chapter 12 Notes Investment Investment refers to spending by business on new plant and equipment. Investment function is: ( 29 rates erest al no i income Y where i Y I int min , , = = A decrease in investment reduces AD and reduces the jobs in the market though the goods markets. Government Spending These are the goods and services purchased by the government. Examples are: School Police Armed forces Highways, etc… Government spending or purchases is denoted as G , where the bar implies a constant amount. Government spending does not include transfers to individuals or firms, because it is already accounted for in consumption. 3 | P a g e
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Chapter 12 Notes Net Exports Net exports are exports minus imports. The net export function can be expressed in two ways. NX = Exports – imports, or = p p E y NX f ε , , Where, ( 29 f y is foreign income, p E is the real exchange rate, and p is the future real exchange rate Another way of saying net exports is the net demand for domestic output. If net export is negative, we have a deficit
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This note was uploaded on 01/22/2012 for the course ECO 3041 taught by Professor Dacal during the Fall '11 term at FIU.

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ECO3041 - Ch 12 Fiscal Policy - Department of Economics,...

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