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Welcome to Day 1!
Fiscal Policy
The Goal of Stabilization:
Influence the amount spent and produced in an economy Meant to meet potential output To have less movements in the business cycle
Automatic Stabilizers:
Discretionary policies are intentional government intervention in the economy Automatic stabilizers are built-in measures that lessen the effects of the business cycle Examples are taxation and transfer payment programs
END OF DAY 1!
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Marginal Propensity to Consume (MPC): the effect on domestic consumption of a change in income MPC answers the question: If income increases this amount, how much extra will be spent on domestic goods and services? MPC= change in consumption on domestic items -----------------------------------------------------change in income Marginal Propensity to Withdraw (MPW): the effect on withdrawals of a change in income 3 types of withdrawals: savings, taxes, and imports MPW= change in total withdrawals -----------------------------------change in income 1.0 = MPC + MPW
MPW=$250
Real
Later Spending Rounds: Total MPC Total MPW Output: 2000 for later spending rounds spending rounds =$250 =$250
Expansion continues until withdrawals equal initial discretionary injection Injections and withdrawals are both $1000 higher than they were before government purchases were increased
The multiplier effect can also be applied to tax cuts Lower taxes allow others to have more funds to spend and invest and therefore in this case the spending multiplier is multiplied with the initial spending from the tax cut Increases the total output and shifts aggregate demand curve Tax adjustment has a small initial effect on spending Since aggregate supply curve gets steeper as it reaches the potential output level, an increase in equilibrium makes the price level rise proportionally more than output
When economy is above its potential, both price level and total output falls; price will fall proportionally more than output Multiplier effect is useful in indicating the maximum change in equilibrium output following a certain fiscal policy
Impact on Spending:
Fiscal policy has a more straightforward impact when altering government purchases than monetary policy, since the government itself initiates the change
End of Day 2
Government deficits were highest during recessions during the early 1980s and early 1990s Tax revenues fell with slumping incomes during that time as a result of the automatic stabilizers Discretionary expansionary policy also contributed since federal government increased purchases of goods and services to counteract the effects of sagging outputs and incomes Canada experienced a period of economic growth, noticeably during 1988 where unemployment was under 8%, the economy was at or above potential output but still budgets didnt show a surplus 1990s downturn caused a concern over increased public debt and lowered confidence in discretionary fiscal policies to counteract a recession
End of Day 3