... Slow economic growth
... 1/(1-MPC) is the general multiplier – with MPC meaning marginal propensity
If the marginal propensity to consume is 0.5, the multiplier is 1/(1-.05) = 1/0.5
= 2. Given a multiplier of 2, a $50 billion increase in government purchases
of goods and services would result in a real GDP o ...
Econ 100Practice Exam 2
... government spending as appropriate. For example the Federal Income tax increases
significantly when the economy is strong, dampening the economic expansion.
Unemployment insurance stimulates the economy during a recession.
QUESTIONS FOR DISCUSSION
... balanced budget would cripple the use of fiscal policy to counteract business
cycles. It would be very difficult to use government spending to stimulate the
economy if taxes also had to be increased to balance the budget. Of course,
since dollar for dollar government spending is more powerful than t ...
... policy is lessened by the progressive tax system.
• Assume the economy is in recession and the government
has increased G to boost employment and real GDP.
• AS some consumers find jobs and increased income,
they start paying more taxes and disposable income falls.
• As Yd falls, it slows down the m ...
... Programs that automatically trigger benefits if
changes in the economy threaten income
Insurance that workers who lose their jobs through
no fault of their own can collect for a limited
amount of time
... Transfers and Taxes
Suppose the government decides to lower
income taxes by a lump-sum $1000.
The MPC = .90.
When Americans get $1000 back into their
pockets, they will save $100 (10%) and spend
... Give an example of an action during a tight
money policy. During what phase of the
business cycle would this occur?
... Assume producers are willing to supply
additional output at a fixed price
Take the interest rate as given
Assume there is no government spending
and taxes (no taxes)
Assume exports and imports are zero (no
Talking Points Presentation - Federal Reserve Bank of St. Louis
... spending and/or increases in taxes, in theory are thought to
decrease overall demand for goods and services. These actions
move the budget position toward a surplus. Contractionary
policies are rarely used.
4. If the government runs a deficit, it borrows to cover the deficit
spending. This borrowing ...
macro review - WordPress.com
... • The government decides to fill a deflationary gap by
increasing its government spending.
• Suppose: Government spends $100 million on a school
... • Driving 20 mph is too slow. The car can easily go
faster. (High unemployment)
• 70mph is sustainable. (Full employment)
• Some cars have the capacity to drive faster then
others. (industrial nations vs. 3rd world nations)
• If the engine (technology) or the gas mileage
(productivity) increase then ...
Economics “Ask the Instructor” Clip 66 Transcript
... Fiscal policy refers to intentional changes in federal government expenditures or in tax receipts
intended to smooth out the business cycle. Expenditures are increased to fight a recession and are reduced,
at least in theory, to combat demand-pull inflation. The other aspect of fiscal policy is taxe ...
... – Government spending is direct
– Taxes depend on what consumers do
with the tax cut or what they would
have done with the money going to
pay the tax increase (how much would
they consume, how much would they
fiscal policy homework
... a) the same effect on AD as a €100 billion increase in G;
b) a weaker effect on AD than a €100 billion increase in G;
c) a stronger effect on AD than a €100 billion increase in G;
d) no effect on AD, since it affects only the "supply side" of the economy.
3. Fiscal policy is more effective:
a) the l ...
In economics, the fiscal multiplier (not to be confused with monetary multiplier) is the ratio of a change in national income to the change in government spending that causes it. More generally, the exogenous spending multiplier is the ratio of a change in national income to any autonomous change in spending (private investment spending, consumer spending, government spending, or spending by foreigners on the country's exports) that causes it. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change.The existence of a multiplier effect was initially proposed by Keynes student Richard Kahn in 1930 and published in 1931. Some other schools of economic thought reject or downplay the importance of multiplier effects, particularly in terms of the long run. The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.In certain cases multiplier values less than one have been empirically measured (an example is sports stadiums), suggesting that certain types of government spending crowd out private investment or consumer spending that would have otherwise taken place. This crowding out can occur because the initial increase in spending may cause an increase in interest rates or in the price level. In 2009, The Economist magazine noted ""economists are in fact deeply divided about how well, or indeed whether, such stimulus works"", partly because of a lack of empirical data from non-military based stimulus. New evidence came from the American Recovery and Reinvestment Act of 2009, whose benefits were projected based on fiscal multipliers and which was in fact followed - from 2010 to 2012 - by a slowing of job loss and private sector job growth.