ECN 204 Lecture Notes - Lecture 9: Output Gap, Procyclical And Countercyclical, Aggregate Demand
10 Dec 2017
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Chapter 13: fiscal policy, deficits, surpluses and debt. Fiscal policy and the ad as model: recall. Increase government spending (increase ad: tax reductions (incentive to spend more/increase investment, combined government spending increases and tax reductions, *may create a budget deficit, balanced budget- expenditures = tax receipts, ex. Increase gov spending by billion to try to close gap of billion: assume mpc is 0. 75, multiplier is 4 (1/1-0. 75). billion x 4 = billion, equal: contractual fiscal policy (discretionary) to gap, used to combat demand pull inflation (inflationary gap to be closed, options, decrease government spending, combined government spending decrease an tax increases. billion, moving economy to higher price levels and lower gdp: policy options: g or t? (g/y, to expand the size of government. If inflation, then increase taxes: to reduce he size of government. Built in stability: net tax revenues vary directly with gdp (pro cyclical, taxes rise when gdp rises, and vice versa.
