- HW #4 due next Wednesday, make a copy to check your answers- Office hours today 2:30-3:45pm in 7416 Social Science and tomorrow 4:45-5:45pm in 6203 Social Science- Read chapter 10---------------------------------------------------------------------------------------------------------------------------- 4 ideas for increasing investments (increasing I will increase K stock which leads to economic growth)o DLF shifts to the right Increasing incentives for investment: - Lowering corporate profits tax- Investment tax credit (e.g. for improving energy efficiency, replacing old leaky windows, etc.) As I (investment) increases so does S (savings)o SLF shifts to the rightiSLFDLF’DLFI2I1Q of LF Increase incentives for saving- Greater uncertainty about the future- Increase in life expectancy- Anticipating early retirement- Change in tastes and preferences with regard to saving (e.g. people raised during the Great Depression are used to saving as much as they can)- Lowering capital gains tax- Move to consumption tax rather than income tax (encourages saving rather than spending) As I increases, so does S and i decreaseso Decreasing the budget deficit Beginning:iSLF’SLFDLFI2I1Q of LFSLF = Sii2DLF = II1Q of LF- Budget deficit: government spending (G) is greater than government revenue (taxes, T)- G > T- The government will need to borrow funds Middle:- Running a deficit “crowds out” investment spending with a deficit I decreases from I1 to I2 End: - Decreasing deficit decreases i, which increases I and increases K stockiSLF = Si1i2I + deficitDLF = II2S2I1Q of LFLevel of private investmentdeficitNew deficitSLF = Si1i3i2DLF = II2S2S3I1Q of LFI3- I + deficit is similar to adding individual demand curves and getting the market demand curveo *Beware Deficit spending may not be entirely bad- E.g. if there is a recession and there is not enough spending, deficit spending may spur the economy (because one person’s spending is another’s income)- E.g. what is invested in might be good/creative or something that wouldnot be invested in privately (e.g. education, national defense, etc.) Lowering the deficit may not be pro-growth (it depends on which programs are
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