ECO102. Macroeconomics Lecture 5

Transcription

1 ECO102 Macroeconomics Lecture 5

2 ECO201 Macroeconomics Chapter 24: The Government and Fiscal Policy

3 ECO102 Macroeconomics The Government and Fiscal Policy Government in the Economy!! Government Purchases (G), Net Taxes (T), and Disposable! Income (Yd)! The Determination of Equilibrium Output (Income) Fiscal Policy at Work: Multiplier Effects! The Government Spending Multiplier! The Tax Multiplier The Federal Budget! The Budget in 2009! Fiscal Policy Since 1993: The Clinton, Bush, and Obama Administrations! The Federal Government Debt The Economy s Influence on the Government Budget! Automatic Stabilizers and Destabilizers! Full-Employment Budget! The Balanced-Budget Multiplier 2

4 fiscal policy The government s spending and taxing policies. monetary policy The behavior of the Federal Reserve concerning the nation s money supply. discretionary fiscal policy Changes in taxes or spending that are the result of deliberate changes in government policy. Government Purchases (G), Net Taxes (T), and Disposable Income (Yd) net taxes (T) Taxes paid by firms and households to the government minus transfer payments made to households by the government. disposable, or after-tax, income (Yd) Total income minus net taxes: Y T. disposable income total income net taxes Yd Y T 3

5 Government Purchases (G), Net Taxes (T), and Disposable Income (Yd) 4

6 Government Purchases (G), Net Taxes (T), and Disposable Income (Y d ) The disposable income (Y d ) of households must end up as either consumption (C) or saving (S). Thus, Y C S d + Because disposable income is aggregate income (Y) minus net taxes (T), we can write another identity: By adding T to both sides: Y T C + S Y C + S + T Planned aggregate expenditure (AE) is the sum of consumption spending by households (C), planned investment by business firms (I), and government purchases of goods and services (G). AE C + I + G 5

7 Government Purchases (G), Net Taxes (T), and Disposable Income (Y d ) budget deficit The difference between what a government spends and what it collects in taxes in a given period: G T. budget deficit G T 6

8 Government Purchases (G), Net Taxes (T), and Disposable Income (Y d ) Adding Taxes to the Consumption Function To modify our aggregate consumption function to incorporate disposable income instead of before-tax income, instead of C = a + by, we write or C = a + by d C = a + b(y T) Our consumption function now has consumption depending on disposable income instead of before-tax income. 7

9 Planned Investment The government can affect investment behavior through its tax treatment of depreciation and other tax policies. 8

10 The Determination of Equilibrium Output (Income) Y = C + I + G TABLE 9.1 Finding Equilibrium for I = 100, G = 100, and T = 100 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Output (Income) Y Net Taxes T Disposable Income Y d Y T Consumption Spending C = Y d Saving S Y d C Planned Investment Spending I Government Purchases G Planned Aggregate Expenditure C + I + G Unplanned Inventory Change Y (C + I + G) Adjustment to Disequilibrium Output Output Output Equilibrium 1, , , Output 1, ,200 1, , Output 1, ,400 1, , Output 9

11 The Determination of Equilibrium Output (Income) 10

12 The Saving/Investment Approach to Equilibrium saving/investment approach to equilibrium: S + T = I + G To derive this, we know that in equilibrium, aggregate output (income) (Y) equals planned aggregate expenditure (AE). By definition, AE equals C + I + G, and by definition, Y equals C + S + T. Therefore, at equilibrium: C + S + T = C + I + G Subtracting C from both sides leaves: S + T = I + G 11

13 We are assuming that the government controls G and T. Three multipliers: Government spending multiplier Tax multiplier Balanced-budget multiplier Government spending multiplier The ratio of the change in the equilibrium level of output to a change in government spending. government spending multiplier = 1 MPS 12

14 The Government Spending 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) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Output (Income) Y Net Taxes T Disposable Income Y d Y T Consumption Spending C = Y d Saving S Y d C Planned Investment Spending I Government Purchases G Planned Aggregate Expenditure C + I + G Unplanned Inventory Change Y (C + I + G) Adjustment to Disequilibrium Output Output Output Output 1, , ,100 0 Equilibrium 1, ,200 1, , Output 13

15 The Government Spending Multiplier 14

16 The Tax Multiplier tax multiplier The ratio of change in the equilibrium level of output to a change in taxes. ΔY = # $ % 1 & (initial increase in aggregate expenditure) ( MPS ' Because the initial change in aggregate expenditure caused by a tax change of T is ( T MPC), we can solve for the tax multiplier by substitution: 1 Δ Y = ( Δ T MPC) = Δ T MPS MPC $ & % ' $ & % ' ( ) ( MPS ) Because a tax cut will cause an increase in consumption expenditures and output and a tax increase will cause a reduction in consumption expenditures and output, the tax multiplier is a negative multiplier: tax multiplier ( MPC ) MPS 15

17 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. balanced-budget multiplier 1 16

18 The Balanced-Budget Multiplier 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) (1) (2) (3) (4) (5) (6) (7) (8) (9) Output (Income) Y Net Taxes T Disposable Income Y d Y T Consumption Spending C = Y d Planned Investment Spending I Government Purchases G Planned Aggregate Expenditure C + I + G Unplanned Inventory Change Y (C + I + G) Adjustment to Disequilibrium Output Output Output 1, ,100 0 Equilibrium 1, , , Output 1, ,200 1, , Output 17

19 TABLE 9.4 Summary of Fiscal Policy Multipliers Policy Stimulus Multiplier Final Impact on Equilibrium Y Government spending multiplier Increase or decrease in the level of government purchases: G 1 MPS Δ G 1 MPS Tax multiplier Increase or decrease in the level of net taxes: T MPC MPS Δ T MPC MPS Balanced-budget multiplier Simultaneous balanced-budget increase or decrease in the level of government purchases and net taxes: G = T 1 ΔG 18

20 A Warning We have been treating net taxes (T) as a lump-sum, fixed amount, whereas in practice, taxes depend on income. Appendix B to this chapter shows that the size of the multiplier is reduced when we make the more realistic assumption that taxes depend on income. We continue to add more realism and difficulty to our analysis in the chapters that follow. 19

21 government budget The budget is really three different budgets: It is a political document that dispenses favors to certain groups or regions and places burdens on others. It is a reflection of goals the government wants to achieve. The budget may be an embodiment of some beliefs about how (if at all) the government should manage the macroeconomy. government surplus (+) or deficit ( ) Government receipts minus expenditures. 20

22 Budget for Turkey Current Prices (Million TL) % Share in GDP GDP 1,098,799 1,298,062 1,434,712 1,571, Net Exports (X-I) 60, ,445 92,045 96, Total Consumption Expenditures 1,159,790 1,413,507 1,526,757 1,667, Investments 211, , , , Public 47,003 53,247 61,832 68, Private 164, , , , Change in Inventories 6,708 26,364-12,441-15, Public -2, , Private 9,194 26,272-13,616-15, Total Investments 218, , , , Public 44,517 53,339 63,007 68, Private 173, , , , Total Consumption 941,752 1,100,514 1,220,156 1,324, Public 120, , , , Private 821, ,669 1,054,114 1,140,

23 Current Prices (Million TL) % Share in GDP C 1,159,790 1,413,507 1,526,757 1,667, I 173, , , , G 165, , , , X-Im 60, ,445 92,045 96, GDP 1,098,799 1,298,062 1,434,712 1,571, Trade Deficit -60, ,445-92,045-96,

24 The Government Debt government debt The total amount owed by the government. privately held government debt The privately held (non-government-owned) debt of the government. 23

25 The Economy s Influence on the Government Budget Automatic Stabilizers and Destabilizers automatic stabilizers Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to stabilize GDP. automatic destabilizer Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to destabilize GDP. fiscal drag The negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion. 24

26 Full-Employment Budget full-employment budget What the federal budget would be if the economy were producing at the full-employment level of output. structural deficit The deficit that remains at full employment. cyclical deficit The deficit that occurs because of a downturn in the business cycle. 25

27 Central Government Debt, Total (% of GDP) for Turkey

28 Government Consumption Expenditure and Taxes (% of GDP) for Turkey Expenditures Taxes 27

29 Review 1) Which of the following is a category of fiscal policy? A) government policies regarding the purchase of goods and services B) government policies regarding taxation C) government policies regarding transfer payments and welfare benefits D) all of the above 28

30 1 D) all of the above. 2) The and the determine tax revenues. A) money supply; income tax rate B) income of households; value of transfer payments C) income tax rate; income of households D) value of transfer payments; money supply 29

31 2 C) income tax rate; income of households. 3) [Y = C + I + G] when in the income-expenditure model. A) net exports are included B) net imports are included C) government is included D) investment is excluded 30

32 3 C) government is included. 4) The government budget deficit or surplus is the difference between what a government and what it in a year. A) pays for imports; spends on exports B) spends; collects in taxes C) earns from transfers; pays in transfers D) spends on programs; gives away in foreign aid 31

33 4 B) spends; collects in taxes. 5) After government is added to the income-expenditure model, the formula for the aggregate consumption function is A) C = a - b(y - T). B) C = a - b(t - Y). C) C = a + b(y + T). D) C = a + b(y - T). 32

34 5 D) C = a + b(y - T). 6) In 2010, the city of Yalova collected $800,000 in taxes and spent $200,000. In 2010, the city of Yalova had a A) budget surplus of $200,000. B) budget surplus of $600,000. C) budget deficit of $200,000. D) budget surplus of $1,000,

35 6 B) budget surplus of $600,000. 7) The aggregate consumption function is C = Yd. If income is $600 and net taxes are zero, consumption equals A) zero. B) 360. C) 460. D)

36 7 D) ) The aggregate consumption function is C = Yd. If income is $2,000 and net taxes are $400, consumption equals A) 900 B) 1,300 C) 3,300 D) 4,

37 8 A) 900. C = Yd! G = 400! T = 200! I = 200 9) The equilibrium level of output for the Italian economy is A) $2,850 B) $3,145 C) $3,700 D) $3,

38 9 C) $3,700. C = Yd! G = 400 T = 200 I = ) At the equilibrium level of output in Italy, consumption equals A) $3,100 B) $3,250 C) $3,400 D) $3,

39 10 A) $3, ) The equilibrium level of aggregate expenditure is $_billion. A) 4,000 B) 3,000 C) 2,000 D) 1,500 38

40 11 C) 2, ) The MPC in this economy is A) 0.4 B) 0.5 C) 0.6. D)

41 12 B) ) If the MPC is 0.5, the tax multiplier is A) B) -2. C) D)

42 13 D) ) The Prime Minister of Richlandia hires you as an economic consultant. He is concerned that the output level in Richlandia is too low and that this will cause unemployment to rise. He feels that it is necessary to increase output by $20 billion. He tells you that the MPC in Richlandia is Which of the following would be the best advice to give to the Richlandian Prime Minister? A) increase government purchases in Richlandia by $15 billion B) reduce taxes in Richlandia by $10 billion C) increase government purchases in Richlandia by $5 billion D) reduce taxes in Richlandia by $4 billion 41

43 14 C) increase government purchases in Richlandia by $5 billion. 15) Taxes are reduced by $70 billion and income increases by $280 billion. The value of the tax multiplier is A) -4. B) -5. C) -10. D)

44 15 A) ) Which of the following equations best represents the aggregate expenditure function? A) AE = 1, Y. B) AE = Y. C) AE = 1, Y. D) AE = 1, Y. 43

45 16 B) AE = Y. 17) If the economy is in a recession, the actual deficit is than the full employment deficit. A) larger than B) equal to C) smaller than D) equal to or larger than 44

46 17 A) larger than. 45