Econ 4.3
Monday, March 1, 1999
Announcements: Test Grades were
sent via email
Lecture notes:
Fiscal Policy: the use of the
government budget on both the revenue and expenditure side to
influence the economy
Chapter 10: The
Government and Fiscal Policy
Government in the Economy
- Fiscal Authority: congress and the
president and state and local officials
- Responsibilities:
- Set Purchasing Levels (G)
- Set Taxes (T)
- We'll assume that G and T are set on constant levels
Disposable Income
- Net Taxes: taxes minus transfers
- Disposable Income: income minus taxes
- Yd=Y - T
- Disposable Income = Income - Taxes
Aggregate Expenditures with Government
- Yd= Y - T
- Yd= C + S
- Y - T = C + S
- Y = C + S + T
- AE = C + I + G
The Model Economy I
- (1) C = 500 + 0.75 x (Income - Taxes) =
500 + 0.75 x Yd
- (2) I = 50
- (3) G = 100
- (4) T = 60
The Model Economy II
- (5) AE = C + I + G
- (5a) AE = 500 +0.75 (Y-60) + 50 + 100
- (5b) AE = 650 + 0.75 (Y-60)
- (6) AE = Y | Equilibrium
- (6a) Y = 650 + 0.75Y - 45
- (6b) Y - 0.75Y = 605
- (6c) 0.25Y = 605
- (6d) Y = 605 / 0.25 = 2420 = AE
The Model Economy III
- (7a) C = 500 +0.75 (2420 - 60) = 2270
- (7b) S = Y - C - T
- (8) S + T = 90 + 60 = 150
- (9) I + G = 50 + 100 = 150
- (10) S + T = I + G | Equilibrium
- (10a) leakages = injections
- (10b) withdrawals = injections
- (10c) W = J | Equilibrium Condition
See figure 10.2 on page 204 in the textbook
- Balanced-Budget Multiplier: the ratio of
change in the equilibrium level of output to a change in
government spending where the change in government
spending is balanced by a change in taxes so as not to
create any deficit. The balanced-budget multiplier is
equal to one: The change Y resulting from the change in G
and the equal change in T is exactly the same size as the
initial change in G or T itself.
|
