ch09 The Government and Fiscal Policy.pptVIP

Prepared by: Fernando Quijano Shelly Tefft;;fiscal policy The government’s spending and taxing policies. ;discretionary fiscal policy Changes in taxes or spending that are the result of deliberate changes in government policy. ;? FIGURE 9.1 Adding Net Taxes (T) and Government Purchases (G) to the Circular Flow of Income ;The disposable income (Yd) of households must end up as either consumption (C) or saving (S). Thus,;budget deficit The difference between what a government spends and what it collects in taxes in a given period: G ? T. ;To modify our aggregate consumption function to incorporate disposable income instead of before-tax income, instead of C = a + bY, we write;The government can affect investment behavior through its tax treatment of depreciation and other tax policies.;Y = C + I + G;? FIGURE 9.2 Finding Equilibrium Output/Income Graphically;saving/investment approach to equilibrium:  S + T = I + G;At this point, we are assuming that the government controls G and T. In this section, we will review three multipliers: Government spending multiplier Tax multiplier Balanced-budget multiplier;;TABLE 9.2 Finding Equilibrium after a Government Spending Increase of 50 (G Has Increased from 100 in Table 9.1 to 150 Here);? FIGURE 9.3 The Government Spending Multiplier;tax multiplier The ratio of change in the equilibrium level of output to a change in taxes. ;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 1: The change in Y resulting from the change in G and the equal change in T are exactly the same size as the initial change in G or T. ;TABLE 9.3 Finding Equilibrium after a Balanced-Budget Increase in G and T of 200 Each (Both G and T Have Increased from 100 in Table 9.1 to 300 Here);TABLE 9.4 Summary of F