ECON 1113 1st Edition Lecture 14 Outline of Last Lecture I. Review of Previous LectureII. Unemployment in the Keynesian Cross Model: the Revenue Act of 1932III. Inflation in the Keynesian Cross ModelA. Fiscal Policies to Combat InflationB. Political Issues and Anti-Inflationary PoliciesIV. Multiplier ConceptOutline of Current Lecture I. Fiscal Policy MultipliersA. The Government Spending Multiplier = mGB. The Tax Multiplier = mTAXC. Another View of Equilibrium in the Keynesian ModelCurrent LectureI. Fiscal Policy MultipliersA. Multiplier = ∆ Y∆ PTE>0 (depends on MPC)B. The Government Spending Multiplier = mG1. Y: nominal GDP or nominal domestic income2. MG = ∆ Y∆ G=1/(1−MPC )3. Examplea. MPC = 0.8b. mG = 1/(1-0.8) = 1/0.2 = 5c. GDP gap = ∆ Y (desired change in Y to restore full employment, or Y*) = $100d. Keynesian Model Diagrami. Ye < Y* and PTE needs to increase to reach the target nominal GDP and remove the GDP gap of $100ii. 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∆ GThese 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.iv. Recall: mG = ∆ Y∆ G=1/(1−MP C )v. For calculating purposes: ∆ G=∆ Y /∆ mGvi.∆ G = +$100 (GDP gap value) /5 (mG value from earlier) = $20vii. By increasing G by $20, the economy will reach Y* by moving the PTE upwardC. The Tax Multiplier = mTAX1. mTAX = ∆ Y / ∆T(change in tax collection) = -MPC/(1-MPC)2. Examplea. MPC = 0.8b. MTAX = -0.8/(1-0.8) = -0.8/0.2 = -4D. Equilibrium Conditions in the Keynesian Model1. PTE = ASk2. Aggregate Withdrawals (W) = Aggregate Injections (J)a. Savings (S) + Taxes (T) = Imports (M) = Wb. Investments (I) + Government (G) + Exports (X) = Jc. Bathtub analogyi. I + G + X = J symbolizes the water flowing into the tub from the faucetii. S + T + M = W represents the water draining from the tubiii. The water level maintained is the level of ongoing economic activityd. Keynesian Model Diagrami. Ye < Y*, meaning the unemployment rate is above 5%ii. A $100 GDP gap also exists between those valuesiii. 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 0.8iv. A line representing injections (I) occurs in an arbitrary horizontal position along the lower portion of the graphv. A line signifying withdrawals also exists within the graph, crossing the I line at the current Y equilibrium pointvi. MTAX = ∆ Y∆ T = -MPC/(1-MPC)vii. For calculating purposes: ∆ T =∆ Y /mTAXviii.∆ T = +$100 (GDP gap value) /-4 (mTAX value from before) = -$25ix. By decreasing T by $25, the economy will reach Y* by moving the PTE upwardx. The previous W line will move to the right to cross the Y*
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