ECON 1113 1st Edition Lecture 14 Outline of Last Lecture I Review of Previous Lecture II Unemployment in the Keynesian Cross Model the Revenue Act of 1932 III Inflation in the Keynesian Cross Model A Fiscal Policies to Combat Inflation B Political Issues and Anti Inflationary Policies IV Multiplier Concept Outline of Current Lecture I Fiscal Policy Multipliers A The Government Spending Multiplier mG B The Tax Multiplier mTAX C Another View of Equilibrium in the Keynesian Model Current Lecture I Fiscal Policy Multipliers Y 0 depends on MPC A Multiplier PTE B The Government Spending Multiplier mG 1 Y nominal GDP or nominal domestic income Y 1 1 MPC 2 MG G 3 Example a MPC 0 8 b mG 1 1 0 8 1 0 2 5 c GDP gap Y desired change in Y to restore full employment or Y 100 d Keynesian Model Diagram i Ye Y and PTE needs to increase to reach the target nominal GDP and remove the GDP gap of 100 ii Greater than 5 unemployment is occurring in this instance that Y is not equal to Y iii To combat unemployment to close the GDP gap fiscal policy makers could increase G from G0 to G1 which equals G These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Y 1 1 MP C G v For calculating purposes G Y mG vi G 100 GDP gap value 5 mG value from earlier 20 vii By increasing G by 20 the economy will reach Y by moving the PTE upward C The Tax Multiplier mTAX 1 mTAX Y T change in tax collection MPC 1 MPC 2 Example a MPC 0 8 b MTAX 0 8 1 0 8 0 8 0 2 4 D Equilibrium Conditions in the Keynesian Model 1 PTE ASk 2 Aggregate Withdrawals W Aggregate Injections J a Savings S Taxes T Imports M W b Investments I Government G Exports X J c Bathtub analogy i I G X J symbolizes the water flowing into the tub from the faucet ii S T M W represents the water draining from the tub iii The water level maintained is the level of ongoing economic activity d Keynesian Model Diagram i Ye Y meaning the unemployment rate is above 5 ii A 100 GDP gap also exists between those values iii To combat unemployment close GDP gap fiscal policy makers could cut taxes from T0 to T1 which equals T which will increase C and T is subject to mTAX MPC 1 MPC when the MPC is 0 8 iv A line representing injections I occurs in an arbitrary horizontal position along the lower portion of the graph v A line signifying withdrawals also exists within the graph crossing the I line at the current Y equilibrium point Y vi MTAX MPC 1 MPC T vii For calculating purposes T Y mTAX viii T 100 GDP gap value 4 mTAX value from before 25 ix By decreasing T by 25 the economy will reach Y by moving the PTE upward iv Recall mG x The previous W line will move to the right to cross the Y value
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