Lecture7

# The multiplier is 1 1 mpc ryan w herzog gu aggregate

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Unformatted text preview: The multiplier is: 1 1 − MPC Ryan W. Herzog (GU) Aggregate Expenditures (15) February 25, 2014 36 / 43 Stabilizing Planned Spending: Fiscal Policy Stabilizing Planned Spending: Fiscal Policy As we’ve already seen, we can use changes in government spending or tax cuts to stimulate the economy. Stabilizing policies are government policies that are used to aﬀect planned aggregate expenditures. Expansionary policies are an increase in spending or a decrease in taxes Contractionary policies are cuts in spending or increases in taxes. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 37 / 43 Stabilizing Planned Spending: Fiscal Policy Example Suppose PAE = 2200 + 0.8Y (Y = 11, 000) and the potential level of output (Y ∗ ) is 13, 000 We have an output gap of 2, 000. First we can use the multiplier and divide by the output gap (2000/5 = 400). This tells us we need to increase the government spending by 400 or cut taxes by 400/.8 = 500. The second approach is to solve for the intercept term: 13, 000 = A + 0.8(13, 000), where A = 2, 600. This tells us we need autonomous spending to increase by 400. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 38 / 43 Stabilizing Planned Spending: Fiscal Policy A Increase in Government Spending (Figure 10.10) Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 39 / 43 Endogenous Taxes and Imports Taxes and Imports as a Function of Income Tax function will become: T = t0 + t1 × Y , where t0 is lump sum taxes and t1 is the tax rate on income. Our import function will become: Z = u + v × Y , where u is autonomous imports and v is the marginal propensity to import. Using PAE = C + I p + G + NX and the consumption function: C = C + MPC (Y − T ) we can plug in the new tax and import functions: PAE = [C + MPC (Y − (t0 + t1 × Y ))] + I + G + X − (u + v × Y ) Rewriting: PAE = [C − (MPC )t0 + I + G + X − u ]+(MPC − MPC × t1 − v...
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## This document was uploaded on 03/18/2014 for the course ECON 202 at Gonzaga.

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