The Government & Fiscal Policy (Government Purchases, Net Taxes,…
The Government &
Government Purchases, Net Taxes, Disposable Income
Net Taxes (T)
Taxes paid by firms and households to the
government minus transfer payments made to households
by the government.
disposable, or after-tax, income (Yd)
minus net taxes: Y − T.
The difference between what a
government spends and what it collects in taxes in a given
period: G − T
Adding Taxes to the Consumption Function
To modify our aggregate consumption function to
incorporate disposable income
The consumption function now has consumption depending on disposable income instead of before-tax income.
The government can affect investment behavior through its
tax treatment of depreciation and other tax policies
Planned investment depends on the interest rate
The behavior of the Federal Reserve concerning the nation money supply.
The government spending & taxing policies.
The ratio of change in the equilibrium level of output to a change in government spending where the change in government spending is balanced by a change in taxes so as not to create any deficit.
Balanced - Budget Multiplier =1
We have been treating net taxes (T) as a lump-sum, fixed
amount, whereas in practice, taxes depend on income
Appendix B to this chapter shows that the size of the
multiplier is reduced when we make the more realistic
assumption that taxes depend on income.
Although we have added government, the story told about
the multiplier is still incomplete and oversimplified.
The ratio of change in the equilibrium level of output to a change in taxes
Government spending multiplier
The ratio of the change in the equilibrium level of output to a change in government spending
Discretionary Fiscal Policy
Changes in taxes/ spending that are the result of deliberate changes in government policy
Equilibrium Output (Income)
The Saving/Investment Approach to Equilibrium
The Federal Budget
Fiscal policy is the manipulation of items in the federal budget,so the federal budget is relevant to our study of macroeconomics
The budget of the federal government.
the product of a complex interplay of
social, political, and economic forces
Federal Government Debt
The total amount owed by the federal
privately held federal debt
The privately held (nongovernment-owned) debt of the U.S. government
The Economy’s Influence on the
Automatic Stabilizers and Destabilizers
Revenue and expenditure items
in the federal budget that automaticallychange with the
state of the economy in such a way as to destabilize GDP
The negative effect on the economy that
occurs when averagetax rates increase because
taxpayers have moved into higher income brackets during
Revenue and expenditure items in
the federal budget thatautomatically change with the state
of the economy in such a way as to stabilize GDP
The deficit that remains at full
The deficit that occurs because of a
downturn in the business cycle
What the federal budget would
be if the economy were producingat the full-employment
level of output