The exact distance of the shift will depend on each

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Unformatted text preview: d; hence there is an upward shift in PAE. The exact distance of the shift will depend on each recipient’s marginal propensity to consume – note (1) the presence of ( cT ) in the consumption function and (2), the mpc measures the proportion of any “income” increase that is consumed – the rest being channelled into withdrawals. For simplicity I assume that all recipients have the same marginal propensity to consume (0.75). Figure 2 shows the upward shift in the economy’s consumption and planned aggregate expenditure schedules; note that net exogenous taxes after the payment, are denoted by T1 . Also shown in Figure 2 is a downward shift in the withdrawals schedule to W1. Withdrawals include saving (S), taxation (T) and imports (M); W S T M . The payment has two effects on the withdrawals schedule. The first will be to shift the withdrawals schedule upwards; this is because some of the payment will be saved – the proportion that is saved will depend on the marginal propensity to consume (the higher the marginal propensity to consume, the smaller will be the increase in saving due to the payment). However, withdrawals also include all of net taxes; in this instance net taxes will fall by the full amount of the payment (recall that the payment is the equivalent of a negative exogenous tax payment; T has fallen to T1 ). As the fall in net taxes exceeds the increase in saving (only a portion of th...
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This document was uploaded on 03/28/2014 for the course ECON 10003 at University of Melbourne.

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