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Tax Multiplier and Equilibrium

Tax Multiplier and Equilibrium - Tax Multiplier and...

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Tax Multiplier and Equilibrium Government Spending: -An eighth of spending is for defense (Discretionary) -The half of the rest is non-discretionary spending (Medicade, Social security, etc.: has to pay these by law, and cannot be cut). -Discretionary spending: education, infrastructure. Xn: -Xn= net exports= exports-imports -National income of an economy and the GDP are identical terms. Lecture: November 10 th 1. What is the notion of equilibrium in the context of a national economy? 2. If we do have equilibrium is the notion of equilibrium synonomous with perfection? 3. If we do not, is necessarily a bad thing? A private economy, and closed one (No government spending or net exports) GDP= NI (supply) C S I AE (demand) 1. Full Capacity 2.Recession 410 B 405 5 20 425 Inflation (DP) GDP increase 1. Full capacity: needs idle resources to increase GDP, yet since it is on the PPF line there are none. There will be a demand pull inflationary response. 2. Recession: GDP uses idle resources available to increase, and supply catches up to demand (AE). Unemployment will go down. 470 450 20 20 470 Stability (S=D) Stability (S=D) 510 480 30 20 500 empl + gdp decr. Worse -Equilibrium does necessarily mean perfection, it means stability. The economy is not moving. Multiplier -Initial payment: the first producer takes some money, but spends the rest. Therefore, the original GDP increase is increased more by the second spending. Then, the next producer takes some money and then spends the rest, continuing this trend. However, the GDP continues to increase. Therefore, the initial payment sparks a layered spending increasing the GDP more than the initial payment is worth by even two or three times.
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