Econ Ch 9 Y C I G C a by S a 1 b y Tax multiplier mpc mps A tax cut always increases equilibrium income regardless of budget deficit or surplus Leakages S T Injection I G At equilibrium leakages equal planned injections When leakages exceed injections there will be unplanned inventory accumulation and income will fall When govnt spending and taxes are both increased or reduced by the same amount GDP will increase or reduce by the same amount 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 the economy ex unemployment compensation Balanced Budget Amendment is an example of an automatic destabilizer Fiscal drag is the negative effect of tax rate increase b c taxpayers have moved in to higher income brackets during an expansion Fiscal Policy govent s spending and taxing policies Expansionary fiscal policy increases G or cuts T It is used to stimulate the economy when there is recession and unemployment in the economy Discretionary Fiscal Policy deliberate changes in taxes or spending If spending transfers and taxes all are fixed and independent of income budget deficit also does not depend on income or state of the economy In such situations actual budget deficit is the same as the full employment budget deficit When the average income tax rates increase as a result of economic expansion it is known as fiscal drag The structural deficit remains the same at full employment In the national income and product accounts the term investment is generally reserved for the accumulation of physical capital by firms Therefore households do not engage in investment They either save or doesn t save The difference between personal income and disposable personal income represents personal tax payments Output at equilibrium when it equals planned aggregate expenditures At equilibrium AE C I G C S T Y Disposable after tax income Yd Y T Budget deficit G T Structural deficit remains at full employment Cyclical deficit occurs due to downturn in the business cycle
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