Economics 1022A/B Lecture Notes - Lecture 5: Disposable And Discretionary Income

• School: Western University
• Department: Economics
• Course: Economics 1022A/B
• Professor: Emilie Rivers

Document Summary

Effect of g and t on the gdp: government expenditure: injection: increase in g = increase in gdp. Change in gdp = 1000 x 1/0. 2 = : taxes: leakage: increase in taxes = decrease in gdp. Increase in tax of = disposable income decreases = consumption. Drops then gdp = -800 x 1/0. 2 = 4000. ** changes in gov"t exp. have a bigger impact on gdp than changes in taxes. Adding impact 1 + 2 = 5000 4000 = 1000 (impact) T or f: equal changes in g and t leave the gdp unchanged. Change in gdp for g= 5(cid:1004)(cid:1004) x 1/0. 25 = . And change in gdp for t = -375 x 1/0. 25 = -1500. So (cid:1005) + (cid:1006) = (cid:1006)(cid:1004)(cid:1004)(cid:1004) 1500 = 500: recessionary gap. Black oval = the amount by which equilibrium gdp falls short of potential. Solution: increase ae: fiscal policy: increase g, lower t, monetary policy: lower interest.