Test 3 Fiscal Policy Lecture 21
- Arizona State University - Tempe
- Microeconomics 211
- Test 3 Fiscal Policy Lecture 21
Last Modified: 2011-11-03
k = 1 / MPLeak
EXPANSIONARY (increase in real GDP)
CONTRACTIONARY (decrease in real GDP)
Manipulating G and T
-GAP gap / K = rec. gap
-the bigger the multiplier, the better (less money needed to close gap)
t = - (k-1)
t = -(MPC-MPI) / (MPS+MPI)
Says that like, an increase of G of 100 and decrease of T by 100, then real gdp will increase by 100 (same amount).
Assume closed economy.
Is an extra leakage.
If prices vary, there's no effect on long run GDP.
It's a backwards facing C
Issue bonds == issue debt
Bonds are debt that must be repaid in the long run. Bonds can be paid off with more borrowing, or taxation.
So borrowing is a DELAYED tax because it has to be paid back with taxation eventually.
Taxation and government borrowing may both have the same effect on spending in the private sector = ricardian equivalence.
Ricardian --> instead of taxing us today or in the future, the effect is the same on private sector spending
Or when a person is credit constrained. (Ie: the person wants to have a higher level of current spending but is unable to borrow, so savings is negative)
**If an increase in government spending and/or a decrease in tax revenues leads to a deficit that is financed by increased borrowing, then the borrowing can increase interest rates, leading to a reduction in private investment.
This reduces leakages as the economy goes into a recession and increases them as it enters a boom.
Smooth out business cycles.
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