Chapter 29 Notes

Government debt sum of past deficit minus the sum of past surpluses Decrease in taxes Aggregate demand increases Consumption expenditure increases Increase in taxes decreases potential GDP The greater the income tax wedge the greater the decrease in equilibrium On the right side of the Laffer curve, is the correct side to be on When we increase aggregate expenditure, it has an multiplier effect Expenditure multiplier = Change in RGDP/Change in expenditure Automatic fiscal policy occurs because of the state of the economy Discretionary fiscal policy act of parliament

Three types of multipliers Government expenditure multiplier o Closed economy = 1/(1-MPC) Autonomous tax multiplier = -MPC/(1-MPC) o Suppose increase change in G by 100 and change in T by 100 o Effect = 100 x [1/(1-MPC)] + 100 x [-MPC/(1-MPC)] Fiscal Policy Government expenditure multiplier in closed economy: 1/(1-MPC) Suppose change in G = 100 million Suppose MPC = 0.75 Multiplier = 1/(1-0.75) = 4 Change in Y = $400 Suppose change in T = 100 million Autonomous tax multiplier in closed economy: -MPC/(1-MPC) MPC = 0.75 Multiplier = -0.75/(1-0.75) Change in Y = -300 million Change in G = 100 million Change in T = 100 million There, change in Y = 100 million When you increase G and T by the same value, you end up with a balanced budget, the effect on the economy is called the balanced budget multiplier Balanced budget multiplier in a closed economy = 1

In an open economy, the government expenditure multiplier = 1/(1 slope of the AE curve) Autonomous tax multiplier = -MPC/(1 slope of the AE curve) Balance budget multiplier = (1-MPC)/(1 - slope of the AE curve) sum of the autonomous and government expenditure multiplier Budget surpluses and deficits Structural balance o Government budget balance when the economy is at potential GDP Cyclical budget o Government budget balance that is a result of RGDP =/= potential GDP Actual budget ** Question on final exam: Ceteris parabus everything else remaining the same