Lecture 4 Slides

Lecture 4 Slides - L ECTURE 4 The Effects of Fiscal...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: L ECTURE 4 The Effects of Fiscal Changes: Government Spending September 21, 2011 Economics 210c/236a Christina Romer Fall 2011 David Romer I. I NTRODUCTION Theoretical Considerations (I) A traditional Keynesian model (sticky prices and demand-determined output in the short run; consumption determined largely by current income; small supply-side effects; etc.) Increases in G (or decreases in T) cause Y, C, and r to rise; I falls. Theoretical Considerations (II) A neoclassical model with lump-sum taxation (flexible prices; permanent-income consumers; ) - Changes in T have no effects (Ricardian equivalence). - The effects of changes in G work through wealth and substitution effects. For example, an increase in G means lifetime private resources are lower, leading to a fall in leisure (and so an increase in labor supply) and a fall in consumption. Theoretical Considerations (III) News of a future rise in G in a neoclassical model with lump-sum taxation - Wealth effects cause immediate falls in consumption in leisure. - Since output is higher and C is lower (and G hasnt yet changed), I is higher. - When the change in G occurs, C and L dont change discontinuously. So I falls sharply. - Theoretical Considerations (IV) Adding GHH preferences to a neoclassical model with lump-sum taxation - Now the marginal utility of consumption is higher when people are working more....
View Full Document

Page1 / 44

Lecture 4 Slides - L ECTURE 4 The Effects of Fiscal...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online