Exam 2 Study Notes

Exam 2 Study Notes - EXAM #2 STUDY NOTES Tax multiplier=...

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Tax multiplier = -(MPC/MPS) An increase in gov’t spending has a direct initial effect on planned aggregate expenditure; a tax increase does not Federal surplus or deficit/ saving = net federal gov’t Federal debt = the total amount owed by the federal gov’t Full employment budget = the benchmark for evaluating fiscal policy by examining what the budget would be like if the economy were producing at the full employment level of output In the long run a cut in tax rates may have a larger effect on aggregate income because it should stimulate investment and growth. Government investment spending may yield larger effects in the long run by stimulating aggregate supply ***Carefully contrast “Keynesian economics” which emphasizes AD in the short run to “supply side economics” which emphasizes AS in the long run.*** ERA FISCAL MONETARY 1980s Easy Tight 1990s Tight Easy 2000s Easy Easy Easy monetary policy = putting interest rates down Deficit and debt - budget deficit=G-T (flow) *when the federal gov’t runs a deficit, it borrows to finance it, issuing securities (treasure bills, gov’t bonds) to the public, including citizens of foreign countries. Debt= sum of the annual deficits (stock) The deficit hinges critically on the state of the economy, since tax revenues and transfer outlays depend national income DEFICIT= G-T; where T=f(y) *if the economy falls into a recession, the gov’t will tend to run a deficit. If the gov’t tires to balance its budget by reducing its expenditures, it will make the recession worse. Structural deficit: the deficit (if any) that would remain at full employment. Cyclical Deficit: the deficit that occurs because of a downturn in the business cycle. U.S. Experience -Deficits/ GDP Ratio (figure 9.4) -Privately Held Debt/GDP (figure 9.5) The U.S has been running large federal budget deficits in recent years, and the Debt/GDP ratio has been rising. Public Debt= privately held debt + intragov’t
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This note was uploaded on 04/07/2008 for the course ECON 304L taught by Professor Staff during the Spring '07 term at University of Texas.

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Exam 2 Study Notes - EXAM #2 STUDY NOTES Tax multiplier=...

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