Professional Documents
Culture Documents
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
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24
The Government
and Fiscal Policy
Prepared by:
Fernando & Yvonn Quijano
2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
The Government
and Fiscal Policy
24
CHAPTER OUTLINE
Government in the Economy
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Yd Y T
Yd C S
Y T C S
Y C S T
And aggregate expenditure (AE) equals:
AE C I G
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C = a + bYd
or
C = a + b(Y T)
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Planned Investment
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Y=C+I+G
300
500
700
900
1,100
1,300
1,500
(2)
(3)
(4)
(5)
Net
Disposable
Consumption
Saving
Taxes
Income
Spending
S
T
Yd / Y T (C = 100 + .75 Yd) (Yd C)
100
100
100
100
100
100
100
200
400
600
800
1,000
1,200
1,400
250
400
550
700
850
1,000
1,150
50
0
50
100
150
200
250
(6)
(7)
Planned
Investment Government
Spending
Purchases
I
G
100
100
100
100
100
100
100
100
100
100
100
100
100
100
(8)
(9)
(10)
Planned
Aggregate
Expenditure
C+I+G
Unplanned
Inventory
Change
Y (C + I + G)
Adjustment
to Disequilibrium
450
600
750
900
1,050
1,200
1,350
150
100
50
0
+ 50
+ 100
+ 150
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Output8
Output8
Output8
Equilibrium
Output9
Output9
Output9
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C+S+T=C+I+G
Subtracting C from both sides leaves:
S+T=I+G
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Balanced-budget multiplier
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MPS
government spending multiplier The ratio of the
change in the equilibrium level of output to a
change in government spending.
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(1)
Output
(Income)
Y
(2)
(3)
(4)
(5)
Net
Disposable Consumption
Saving
Taxes
Income
Spending
S
T
Yd / Y T (C = 100 + .75 Yd) (Yd C)
(6)
(7)
Planned
Investment Government
Spending
Purchases
I
G
(8)
(9)
(10)
Planned
Unplanned
Aggregate
Inventory
Adjustment
Expenditure
Change
To
C + I + G Y (C + I + G) Disequilibrium
300
100
200
250
50
100
150
500
200
Output8
500
100
400
400
100
150
650
150
Output8
700
100
600
550
50
100
150
800
100
Output8
900
100
800
700
100
100
150
950
50
Output8
1,100
100
1,000
850
150
100
150
1,100
1,300
100
1,200
1,000
200
100
150
1,250
+ 50
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Equilibrium
Output9
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1
Y (initial increase in aggregate expenditure)
MPS
1
MPC
Y ( T MPC )
T
MPS
MPS
tax multiplier
MPC
MPS
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balanced-budget multiplier 1
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TABLE 24.3 Finding Equilibrium After a Balanced-Budget Increase in G and T of 200 Each
(Both G and T Have Increased from 100 in Table 24.1 to 300 Here)
(1)
Output
(Income)
Y
(2)
(3)
(4)
Net
Disposable
Consumption
Taxes
Income
Spending
T
Yd / Y T (C = 100 + .75 Yd)
(5)
(6)
(7)
(8)
(9)
Planned
Investment
Spending
I
Government
Purchases
G
Planned
Aggregate
Expenditure
C+I+G
Unplanned
Inventory
Change
Y (C + I + G)
Adjustment
To
Disequilibrium
500
300
200
250
100
300
650
150
Output8
700
300
400
400
100
300
800
100
Output8
900
300
600
550
100
300
950
50
Output8
1,100
300
800
700
100
300
1,100
1,300
300
1,000
850
100
300
1,250
+ 50
Output9
1,500
300
1,200
1,000
100
300
1,400
+ 100
Output9
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Equilibrium
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Policy Stimulus
Multiplier
Government
spending
multiplier
1
MPS
Tax multiplier
MPC
MPS
Balanced-budget
multiplier
Simultaneous balanced-budget
increase or decrease in the
level of government purchases
and net taxes: G = T
Final Impact On
Equilibrium Y
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1
MPS
MPC
MPS
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FIGURE 24.4 Federal Personal Income Taxes as a Percentage of Taxable Income, 1993 I2007 IV
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FIGURE 24.6 The Federal Government Surplus (+) or Deficit () as a Percentage of GDP,
1993 I2007 IV
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FIGURE 24.7 The Federal Government Debt as a Percentage of GDP, 1993 I2007 IV
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Fiscal Drag
fiscal drag The negative effect on the economy
that occurs when average tax rates increase
because taxpayers have moved into higher
income brackets during an expansion.
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MPS
MPC
MPS
7. Tax multiplier
8. Balanced-budget multiplier 1
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APPENDIX A
DERIVING THE FISCAL POLICY MULTIPLIERS
THE GOVERNMENT SPENDING AND TAX MULTIPLIERS
C a b(Y T )
Y C I G
Y a b(Y T ) I G
Y a bY bT I G
Y bY a I G bT
Y (1 b) a I G bT
1
Y
(a I G bT )
1 b
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APPENDIX A
DERIVING THE FISCAL POLICY MULTIPLIERS
THE BALANCED-BUDGET MULTIPLIER
G
C T ( MPC )
G T (MPC )
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APPENDIX A
DERIVING THE FISCAL POLICY MULTIPLIERS
THE BALANCED-BUDGET MULTIPLIER
1
We can now apply the expenditure multiplier
MPS
1
Y G ( MPS )
G
MPS
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APPENDIX B
THE CASE IN WHICH TAX REVENUES DEPEND ON INCOME
Yd Y T
Yd Y (200 1 / 3Y )
Yd Y 200 1 / 3Y
C 100 .75Yd
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APPENDIX B
THE CASE IN WHICH TAX REVENUES DEPEND ON INCOME
Y C I G
Y 100 .75(Y 200 1/ 3Y ) 100 100
I
G
C
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APPENDIX B
THE CASE IN WHICH TAX REVENUES DEPEND ON INCOME
THE GOVERNMENT SPENDING AND TAX MULTIPLIERS ALGEBRAICALLY
C a b(Y T )
C a b(Y T0 tY )
C a bY bT0 btY
Y a bY bT btY I G
0
1
Y
(a I G bT0 )
1 b bt
1
1 b bt
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