Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41CHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster1 of 39PowerPoint Lectures for Principles of Macroeconomics, 9eBy Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;CHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster2 of 39PART III THE CORE OF MACROECONOMIC THEORY9© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and OsterThe Governmentand Fiscal PolicyFernando & Yvonn QuijanoPrepared by:CHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster4 of 399Government in the EconomyGovernment Purchases (G), Net Taxes (T), and Disposable income (Y d)The Determination of Equilibrium Output(Income)Fiscal Policy at Work: Multiplier EffectsThe Government Spending MultiplierThe Tax Multiplier The Balanced-Budget MultiplierThe Federal BudgetThe Budget in 2007Fiscal Policy Since 1993: The Clinton andBush AdministrationsThe Federal Government DebtThe Economy’s Influence on the Government Budget Tax Revenues Depend on the State of the Economy Some Government Expenditures Depend on the State of the EconomyAutomatic StabilizersFiscal DragFull-Employment Budget Looking AheadAppendix A: Deriving the Fiscal PolicyMultipliersAppendix B: The Case in Which Tax RevenuesDepend on Income CHAPTER OUTLINEThe Governmentand Fiscal PolicyPART III THE CORE OF MACROECONOMIC THEORYCHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster5 of 39The Government and Fiscal Policyfiscal policy The government’s spending and taxing policies. monetary policy The behavior of the Federal Reserve concerning the nation’s money supply.CHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster6 of 39Government in the Economydiscretionary fiscal policy Changes in taxes or spending that are the result of deliberate changes in government policy. 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. Government Purchases (G), Net Taxes (T), and Disposable Income (Yd)disposable income ≡ total income − net taxesYd ≡ Y − TCHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster7 of 39Government in the EconomyGovernment Purchases (G), Net Taxes (T), and Disposable Income (Yd) FIGURE 9.1 Adding Net Taxes (T) and Government Purchases (G) to the Circular Flow of IncomeCHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster8 of 39Government in the EconomyGovernment Purchases (G), Net Taxes (T), and Disposable Income (Yd)When government enters the picture, the aggregate income identity gets cut into three pieces:Y Y Td Y C Sd Y T C S  Y C S T  And aggregate expenditure (AE) equals:AE C I G= + +CHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster9 of 39Government in the EconomyGovernment Purchases (G), Net Taxes (T), and Disposable Income (Yd)budget deficit The difference between what a government spends and what it collects in taxes in a given period: G - T. budget deficit ≡ G − TCHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster10 of 39Government in the EconomyGovernment Purchases (G), Net Taxes (T), and Disposable Income (Yd)Adding Taxes to the Consumption FunctionTo modify our aggregate consumption function to incorporate disposable income instead of before-tax income, instead of C = a + bY, we writeC = a + bYdorC = a + b(Y − T)Our consumption function now has consumption depending on disposable income instead of before-tax income.CHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster11 of 39Government in the EconomyGovernment Purchases (G), Net Taxes (T), and Disposable Income (Yd)Planned InvestmentThe government can affect investment behavior through its tax treatment of depreciation and other tax policies.CHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster12 of 39Government in the EconomyThe Determination of Equilibrium Output (Income)Y = C + I + GTABLE 9.1 Finding Equilibrium for I = 100, G = 100, and T = 100(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)Output(Income)YNetTaxesTDisposableIncomeYd Y  TConsumptionSpending(C = 100 + .75 Yd)SavingS(Yd – C)PlannedInvestmentSpendingIGovernmentPurchasesGPlannedAggregateExpenditure C + I + GUnplannedInventoryChangeY  (C + I + G)Adjustmentto Disequi-librium300 100 200 250 50100 100 450 150 Output500 100 400 400 0 100 100 600 100 Output700 100 600 550 50 100 100 750 50 Output900 100 800 700 100 100 100 900 0 Equilibrium1,100 100 1,000 850 150 100 100 1,050 + 50Output1,300 100 1,200 1,000 200 100 100 1,200 + 100Output1,500 100 1,400 1,150 250 100 100 1,350 + 150OutputCHAPTER 9 The Government and Fiscal Policy© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster13 of 39Government in the EconomyThe Determination of Equilibrium Output (Income) FIGURE 9.2 Finding Equilibrium Output/Income GraphicallyBecause G and I are both fixed at 100, the aggregate expenditure function is